C$ US$ MXN BRL ARS ZAR INR A$ SEK NOK £ € RUB CNY HK$ NZ$ PLN CHF ¥ We discuss the current soft patch in global activity and the evidence of US underperformance. FX performance across a range of currencies remains consistent with a cyclical soft patch. Latam differentiation offers interesting opportunities in FX, currently. We revise our 5-year forecasts, which remain closely linked to our GSDEER model. The Global FX Monthly Analyst June 2011
Transcript
C$
US$
MXN
BRL
ARS
ZAR
INR
A$
SEK
NOK
£
€
RUB
CNY
HK$
NZ$
PLN
CHF
¥
We discuss the current soft patch in global activity and the evidence of US underperformance. �
FX performance across a range of currencies remains consistent with a cyclical soft patch. �
Latam differentiation offers interesting opportunities in FX, currently. �
We revise our 5-year forecasts, which remain closely linked to our GSDEER model. �
The Global FX Monthly AnalystJune 2011
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Contents
Overview Recommended FX Trade Ideas i
Feature ii
G3 US Dollar 1
Euro 3
Japanese Yen 5
Europe, Middle East & Africa British Pound 7
Czech Koruna 8
Hungarian Forint 9
Israeli Shekel 10
Norwegian Kroner 11
Polish Zloty 12
Russian Ruble 13
South African Rand 14
Swedish Krona 15
Swiss Franc 16
Turkish Lira 17
Americas Argentine Peso 18
Brazilian Real 19
Canadian Dollar 20
Chilean Peso 21
Colombian Peso 22
Mexican Peso 23
Peruvian New Sol 24
Venezuela Bolivar 25
Asia Australian Dollar 26
Chinese Yuan 27
Hong Kong Dollar 28
Indian Rupee 29
Indonesian Rupiah 30
Korean Won 31
Malaysian Ringgit 32
New Zealand Dollar 33
Philippine Peso 34
Singapore Dollar 35
Taiwan Dollar 36
Thai Baht 37
FX Analytics Interest Rate Forecasts 38
GS Sentiment Index 39
FX Currents 41
GS Trade Weighted Indices 43
GS Anecdotal Flows 45
GSDEER 47
Key Economic Data 49
Policy Rate Forecasts 54
Exchange Rate Forecasts 55
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The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Recommended FX Trade Ideas
Please see our Global Markets Daily Comment and Trade Updates for changes in these live trading strategies, as they change in line with market developments and our views.
Tactical FX Trade Performance 2011
Number Cum Return Avg Return Avg Duration
All Trades 11 5.5% 0.50% 71 days
Profitable 7 12.7% 1.81% 71 days
Loss-Making 4 -7.2% -1.80% 56 days
Recent Tactical FX RecommendationsOpen Quote Close Quote Potential
Short MXN CLP 06-Jun-11 "12:22" 15-Jun-11 "17:00" 39.9703 39.3586 1.55%
Description Open Close
Our Recommended Top Trades for 2011Trade Opened At Now At
1. Short $/CNY via 2yr NDFs, expiring 4/12/2012 01-Dec-10 6.3677 6.3296 0.60 %
2. Long US Large-Cap Commercial Banks (BKX) 01-Dec-10 45.64 n/a 13 %
3. Close long US High Yield (CDX 15 index) 01-Dec-10 533.34 n/a 5.2 %
4. Long US Nikkei 225 (NKY) 01-Dec-10 9988.05 9574.32 -4.14 %
5. Close a basket of Crude, Copper, Cotton/Soybeans and Platinum 01-Dec-10 100 n/a 25 %
6. Long 5-yr JPY Inflation Swaps 15-Feb-11 -13 8 21 bp
7. Long EM equities (EEM) 30-Mar-11 48.51 47.09 -2.927231 %
8. Short $/NOK 23-May-11 5.60 5.43 3.09 %
Potential Gain
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The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Feature FX Trends During the Soft Patch
The Current Soft Patch in the Global Economy Over the past few weeks, the dominant theme in markets has been a significant and persistent slowing in US and, to a degree, global growth. Our major proprietary indicators of future activity, the Global Leading Indicator (GLI), and of current activity, including our US Current Activity Index (CAI), have clearly signalled that slowdown. Markets have responded to the softening growth news in many places: bond yields have headed sharply lower, cyclical equities have underperformed substantially and most equity indices are well off their peaks.
Arguably, the most important assessment across markets now is to judge the sources of that slowdown and how much the current news represents a temporary ‘air pocket’ (attributable to the recent oil spike, Japanese supply disruptions or mean reversion in the data) and how much it is a sign that underlying growth is weaker than we thought.
Our GLI has continued to decline, with momentum falling to zero in the most recent reading. Global PMIs also have fallen significantly from their Q1 peaks, and a sizable majority of PMIs from around the world declined in both April and May. Based on our model of global PMIs, we estimate that these are now consistent with a current run rate for global growth at 3.5%qoq annualised, down from a peak reading of close to 6% at the start of the year and below our current global forecasts of about 4%qoq annualised growth for 2011Q2.
Recent global growth performance has been dominated by a soft patch.
High oil prices and Japanese supply disruptions have likely played an important role.
The soft patch seems particularly pronounced in the US, which supports our USD-bearish stance.
Otherwise, we remain constructive on NJA currencies and the Euro.
Latin America seems to offer interesting differentiation opportunities.
We revise our 5-year forecasts, which remain closely linked to our GSDEER ‘fair value’ estimates.
In the past couple of months the global economy has shown more signs of a soft patch, a good part of which appears to be related to the spike in oil prices and Japanese supply disruptions. Still, the weakness seems more concentrated in the US than elsewhere. This cyclical backdrop is very supportive of our core FX views summarised by Dollar weakness, and likely strength in NJA and commodity currencies. We also remain fairly constructive on the Euro and sovereign issues, although we recognise that the headline risk has increased substantially in recent weeks. European sovereign issues have also been a factor in our CHF forecast revisions this month. Interesting opportunities seem to arise in terms of differentiation in Latin American currencies, where we like the CLP relative to the MXN. Finally, we have updated our 5-year forecasts, which as usual tend to remain close to our GSDEER ‘fair value’ estimates.
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Our PMI Model Points to Slowing But Still Strong Global Growth
Global PMI Model
Global Growth
GS F'cast
Source: GS Global ECS Research
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The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
As we discussed in a recent Global Economics Weekly, supply shocks from both oil prices and the Japanese earthquake have played a meaningful role in the recent slowdown, and some of the decline in global industrial data may represent ‘payback’ for a surprisingly strong first quarter. As some of the temporary pressures reverse—and there are tentative signs that this is beginning to happen—we are likely to discover that some of the recent weakness has been overstated.
Most ways of accounting for those temporary factors, however, suggest that underlying US growth may be softer than we thought at the start of the year, as Jan Hatzius has recently suggested. However, it is less clear—at least with the data at hand—that the same is true elsewhere around the world.
With currency markets always expressing a relative view on two countries, the perception that the US is going through a deeper soft patch than other countries and other regions will matter for the Dollar. The latest cyclical news will therefore likely be supportive for our current FX views, in particular if mean-reversion forces lead to better cyclical data after the current soft patch and a better performance of risky assets.
Mapping Cyclical FX Performance In the previous issue of the Global FX monthly Analyst, we argued that the deceleration in global cyclical data would have three key implications: (i) it would contribute to Dollar weakness, (ii) it would lead to strong performance in currencies with strong underlying appreciation pressures, such as NJA FX, and (iii) it would lead to underperformance in high beta currencies such as the TRY. According to empirical evidence, it is only at times of outright negative momentum in our Global Leading Indicator (GLI) that risk aversion flows dominate and the Dollar strengthens across the board. Thus, by and large, our broad trading stance was set to benefit at the current moderate softening in global growth data, particularly since most of the loss of growth momentum was coming from the US data side.
Since the GLI began to lose momentum in January 2011, some of those basic patterns have been confirmed. The main one was the weakness in the US Dollar. This Dollar weakness has gone above and beyond what historical averages would predict. A simple average of returns across currencies indicates that the current episode of Dollar weakness has been seven times larger than the average Dollar weakness over similar cyclical shifts in the past. Other US factors, beyond the cycle, appear to be at play here; the structural pressures from a wide BBoP deficit and more dovish monetary policy than in most other countries have been two key factors, as we have argued consistently over the past few months.
In addition, the relative performance of different currencies has similarities to the patterns observed during previous periods of GLI deceleration in momentum. Looking at how the ranking of FX performance relative
to the Dollar over periods of GLI momentum deceleration (outside recessions) correlates with the current rank in FX performance, we observe that currencies that have typically outperformed (such as the NOK, CHF, SEK and PLN) have done well in this episode, with the exception of the JPY, which has been flat despite broader Dollar weakness for a number of idiosyncratic reasons (including the impact of the recent natural disasters). However, currencies such as the TRY and the ZAR have underperformed their peers. The notable exception is the BRL, which has performed quite strongly relative to past norms, most likely due to the intense pressures from a very strong local growth cycle. Overall, the correlation between the ranking of average performance of various currencies during times of cyclical deceleration with the current ranking (since January 2011) is about 35%.
In contrast, there is zero correlation between rankings in FX performance during times of negative momentum in the GLI (typically coinciding with recessionary environments) and current rankings of performance since January. This suggests that the FX market leans towards a scenario of temporary slowdown, and not a ‘double dip’.
But this also highlights the crucial assumption in our exercise: a decline of GLI momentum in negative territory could signal more risk-averse market outcomes and hurt our recommended positions.
Our Core Views in Summary The description of the current cyclical situation as a temporary soft patch, with some signs of more structural weakness in the US is largely reflected in our broader views of the FX market. More specifically:
The strongest conviction view remains that more Dollar weakness is likely, mainly because of structural imbalances and weakness in the US tradable goods sector. This weakness is visible in a persistent current account deficit, while employment in the manufacturing sector has been in rapid decline since
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try
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Average Performance Rank GLI Slowdown ex Recessions
Current Performance Rank
Currencies Have Performed in Line With Historical Ranks During Times of GLI Deceleration
Source: GS Global ECS
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The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
about 2001 (as we illustrated in more detail in the last FX Monthly). As a result of high unemployment and the trade deficit, the US is facing external funding needs, and relatively lower interest rates than most other countries. With structural factors holding back growth, capital inflows are relatively slow as well. Combined, these factors will likely translate into continued USD weakness, which in turn should help address the structural imbalances.
Looking at the other side of the US imbalances, we think further substantial appreciation potential persists in Asia. In many respects the Asian economies are the inverse of the US. Strong growth and capacity-constrained domestic markets fuel inflation at the same time as external surpluses and rapid reserve accumulation point to substantial appreciation pressures. Of course, policymakers have tried to resist these appreciation pressures in the past but rising inflation in particular is the primary reason to allow more appreciation.
Rising commodity prices effectively strengthen these trends, spilling over into core inflation and tighter monetary policy in Asia—while leading to declining real disposable income in the US, as well as weaker domestic demand. The need for fiscal tightening in the US likely further amplifies the Dollar downtrend. Currencies in countries with significant commodity exports will at the margin continue to outperform.
Outside the US and Asia, we believe the Euro will benefit from broad USD weakness, in particular because we think the fiscal stress in the Euro-zone will ultimately abate. In the short term, however, the focus on Greece has increased the headline risks once again. At the time of writing, the negotiations over an additional funding package look gridlocked. That said, we continue to believe that a disorderly outcome remains unlikely because of the risks involved for all parties, as discussed by Francesco Garzarelli in today’s European Views: ‘Greece: A Managed
Deleveraging’. We would also highlight that the challenges to the peripheral countries seem relatively small compared with the overall size of the Euro-zone.
The difference in economic and FX performance across Latam is intriguing. On the one hand, we see Mexico with strong exposure to the structurally challenged US and, on the other, we see places such as Chile, Colombia or Brazil ideally positioned to benefit from the secular rise in EM and BRIC countries. We will discuss this in more detail in the next section.
Lastly, there are some specific concerns about Turkey and the large external imbalances, which appear to lead to continued weakness of the Turkish lira, with some risks of accelerating price action.
Increased Growth Differentiation in Latam In a series of Global Markets Dailies, Robin Brooks and Alberto Ramos recently looked at growth differentiation across Latin America. They began by focusing on one particular driver of growth, the credit impulse, and the role it currently plays in differentiating economic activity across the region. The credit impulse is an idea that is distinct from credit growth, and—following an academic paper by Biggs et. al. (2009)—aims to provide a mapping from credit growth to GDP. The basic idea is that GDP is a flow variable, so that when looking at GDP growth, one is in effect looking at something akin to the second derivative. This means that, when assessing the impact of credit on activity, one should look not at credit growth (the first derivative) but at the change in credit growth (the second derivative).
Looking across Latin America, they found that the credit impulse is especially supportive of economic activity in Chile and Colombia (see chart on the next page). In the former, credit growth has risen from a relatively low level, but the large role that credit plays in the economy (credit exceeds 60% of GDP) means that the credit impulse is large. In Colombia, the reverse is true: credit growth is high and rising, which suggests that—even though credit is only about 30% of GDP—the credit impulse to growth is just as large as in Chile. In contrast, although credit growth in Brazil remains high, it has stopped rising/accelerating, and this is driving the credit impulse to growth back down to virtually zero. Because it is the second derivative that matters, the credit boom in Brazil—from a growth perspective—is therefore now in the rearview mirror. A similar pattern is playing out in Peru, where the credit impulse has also gone to flat in recent months. Mexican credit growth is picking up, but because credit is only 13% of GDP, the growth impulse from this channel is negligible.
Overall, their analysis was therefore most bullish for Colombia and Chile, and less so for Brazil, Mexico and Peru. Of course, credit is only one of many growth drivers, and so they subsequently widened their focus to look at growth momentum more broadly.
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80 84 88 92 96 00 04 08 12
Index, 1980=100 USD Real Trade Weighted Index
Source: GS Global ECS Research
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The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
In the first quarter of this year, real GDP grew a significant 1.6%qoq in Peru, a strong 1.3%qoq in Brazil and Chile, and a tepid 0.5%qoq in Mexico. For Colombia, strong industrial production (IP) and retail sales (the credit impulse at work) suggest that growth could be around 2.0%qoq in Q1, the same pace as in Q4. Across the board, with the exception of Mexico, growth momentum in Q1 was fairly strong across the region.
Looking ahead to growth in Q2, Chile’s monthly activity indicator (IMACEC) grew at an annualised pace of 4.1%mom, following annualised growth of 7.1%mom in March. This rapid pace of sequential activity, together with favourable base effects, suggests that Q2 growth could be as strong as 0.8%qoq, simply on the momentum already in the pipeline (assuming sequential growth of 0.0% in May and June). In Brazil, core retail sales fell on a sequential basis in April, as did industrial production, which—together with less favourable base effects—could point to slower growth in Q2. For Mexico, industrial production fell on a sequential basis for the third month in a row in April. In addition, although retail sales have not yet been released for April, the fact that consumer confidence weakened from its Q1 average suggests that the downside surprise to Q1 GDP growth could have been more than just a blip in the data. Underlying growth momentum could thus genuinely be slowing. Indeed, the monthly pace of real GDP growth (as measured by INEGI) was steadily slowing within Q1, consistent with sequential weakening. A likely explanation for this is weakening external demand from the US, as discussed above, to which Mexico is especially vulnerable given the close integration between the two economies. Meanwhile, higher frequency Q2 data for Colombia and Peru are not yet available.
Reflecting these developments, our Latin America economics team recently revised their growth outlook for the region. Here, our main forecast changes were for Chile, where they revised up growth to 6.6% this year from 6.4% previously, on the back of the strong growth momentum discussed above. The main other revision was
a downgrade to the growth outlook for Mexico, to 4.4% in 2011 from 5.0% previously, and to 4.5% in 2012 from 4.6% previously. The revisions in Mexico reflect downward revisions to the path of sequential real GDP growth during 2H2010, the softer than expected 1Q2011 real GDP print, and budding signs that the industrial cycle is maturing while the non-tradable sectors of the economy are recovering at a more moderate than expected pace. For Peru, they revised down 2011 growth to 6.4% from 6.8% on election-related uncertainty, which is holding back investment. For Brazil and Colombia, they held their growth forecasts constant (at 4.5% and 5.5% in 2011), as these forecasts were in line with the evolving data.
On the back of the mounting growth differentiation within Latin America, on June 6 we recommended going short MXN/CLP (at the time 39.99), with a target of 38.00 and a stop of 40.80, for a potential gain of 5%. Since initiation, this trade is up just over 1%.
New 5-year Forecasts We are revising our 5-year FX forecasts for the first time since Global Viewpoint 9/17. The table on the next page contains our new forecasts. As a starting point for long-term projections, we use equilibrium exchange rate estimates on the assumption that currencies tend to revert to ‘fair value’ over time. Our GSDEER fair value model uses inflation, productivity and terms of trade to determine the equilibrium level for the currencies we cover. In most cases, the 5-year forecasts are identical to our latest GSDEER estimates and vary from our previous 5-year forecasts only when the fair value estimate moved as well.
However, there is a number of reasons why it may be unlikely that a currency will revert to fair value over a 5-year horizon. For example, the HKD is pegged to the USD, and we expect the current arrangement to hold. Our 5-year forecast for $/HKD therefore coincides with the current peg and not with GSDEER. In Asia, besides the HKD, we think that the CNY will appreciate further due to the large external surplus, excess reserve accumulation and inflationary pressures, which all suggest we will see continued gradual appreciation well beyond the GSDEER equilibrium level. Moreover, as we have pointed out before, the rapid changes in the Chinese economy create particular challenges for CNY equilibrium estimates. For the KRW, we expect the spot to remain stronger than implied by GSDEER due to strong growth dynamics and large portfolio inflows. In the Philippines, we expect the PHP to approach GSDEER; however, due to the strong current account and income balance, we expect the PHP to remain on the strong side of fair value for the foreseeable future. For the INR, there were large upward revisions in inflation lately, pushing up GSDEER fair value. However, the strong capital inflows are likely to compensate for some of the inflation pressure. Thus, we think that the INR will not reach fair value within the next 5 years.
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in Q1 2011 %annual GDP (4qma)
Credit impulse in Latin America
Source: Haver Analytics
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The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
In the European time zones, we focus on Russia and Norway and their commodity linkages. We expect further commodity-related surpluses in Russia and thus we have kept our RUB forecast unchanged. On the other hand, the NOK is largely immune to appreciation pressures implied by the large terms of trade gains linked to rising oil prices, as the majority of its oil revenue is kept offshore in the Government Pension Fund. We have therefore kept our NOK forecast unchanged.
In Latin America, we expect the ARS and VEF to continue to differ from GSDEER. For the ARS, our model uses official inflation figures, which are thought to significantly underestimate inflation. If the higher non-government estimates are used, GSDEER would barely show any undervaluation. Thus, we think that $/ARS will
move higher. The VEF has been pegged to the Dollar since 2003. Since then, inflation has remained high and macro and political dynamics argue for a weaker currency.
In addition to the spot forecasts, we calculated the implied TWI forecast 5 years ahead for the currencies in the last column of the table. For most of the currencies, the difference between GSDEER and spot is similar to that on a trade-weighted basis. However, the forecasts for some countries are affected by large trade weights to countries where the forecast differs from GSDEER. For instance, China has a negative impact on almost all of Asia. As we expect the CNY to strengthen more than GSDEER would imply, the TWI forecast for its close trading partners is weaker.
Our new 5-yr forecastsSpot GSDEER CA TWI Spot TWI GSDEER TWI
14/06/2011 Q42012 Old New 14/06/2011 Q42012 Forecast
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
New FX Forecasts Lastly, we have made a few forecast revisions on the 3-, 6- and 12-month horizons after the more comprehensive changes published last month. In addition to a slightly more bullish view on commodity producers (the CLP and the COP), we have made a more substantial change to the Swiss Franc. Persistent strength in the local economy, with little sign of export weakness, suggests the degree of overvaluation can be maintained for longer and CHF weakness may take longer to materialise. In addition, we find evidence of continued unwinding pressure of legacy CHF carry trades. It is also likely that renewed sovereign tensions related to Greece have strengthened safe-haven flows into the Swiss Franc. All this suggests that the EUR/CHF cross will remain range-bound at around 1.23 on a 3- and 6-month horizon, before gradually rising again towards 1.25 in 12 months’ time.
New FX Forecasts
3m 6m 12m 3m 6m 12m
EUR/CHF 1.23 1.23 1.25 1.30 1.30 1.33
$/RUB 27.7 26.0 25.3 27.9 26.5 25.3
$/KRW* 1060 1050 1040 1050 1030 1030
$/CLP 460 460 460 470 470 465
$/COP 1750 1750 1800 1800 1800 1850
$/PEN 2.78 2.80 2.82 2.76 2.76 2.77
*Forecast changes released since our last FX Monthly w as published Source: GS Global ECS Research
New Forecasts Old Forecasts
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The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
G3 US Dollar FX Forecasts: We maintain our EUR/$ forecast at 1.45, 1.50 and 1.55 in 3, 6 and 12 months. Our $/¥ forecast is also unchanged at 82.0, 82.0 and 86.0. Current GSDEER for EUR/$: 1.18; $/¥: 108.3.
Motivation for Our FX View: Broad Dollar weakness remains our core view. Underpinning our Dollar-bearish views are the structural, large twin deficits that will likely persist. The overall monetary stance of the US also stands in contrast to the rest of the world, as our base case remains that there will be no Fed hikes for the next two years. In the near term, unsettled risk sentiment could still lead to bouts of Dollar strength, given risk correlations. But the overall backdrop of continued global recovery and accommodative policy in the majors should eventually prove supportive for risky assets.
Monetary Policy and FX Framework: The Fed has a dual growth and inflation target. As a result, monetary policy has generally been more volatile and reactive than in pure inflation-targeting countries. The exchange rate floats freely. The US Treasury is in charge of FX policy, although the Fed occasionally comments on currency issues too.
Growth/Inflation Outlook: The US economy has slowed in the past months, largely due to higher oil prices and supply chain disruptions. As a result, our 2011 growth forecast is now 2.6% and our forecast for 2012 is now 3.2%. We see considerable spare capacity in the economy, which underpins our view of continued muted core inflationary pressures.
Monetary Policy Forecast: In the past months, the market moved from an expected hike later this year to further easing. We currently think that the hurdle for further easing is quite high, but we continue to believe that the first hike is most likely to occur in 2013, given that we are still far from the Fed's twin mandates of 'maximum employment and price stability'.
Fiscal Policy Outlook: Over the next few years, the US will need to undertake fiscal tightening of at least 6% of GDP. This would be one of the biggest adjustments in four decades across OECD countries as a share of national GDP, and the biggest as a share of global GDP. We expect only a modest fiscal tightening in the near term. That said, the probability of more fiscal consolidation will likely rise after the presidential elections.
Balance of Payments Situation: The US is running the worst BBoP position of the G10 countries, with a deficit of around 2% of GDP, reflecting the fact that the US is failing to fund its current account deficit of over 3% of GDP.
Things to Watch: The pace of the US cyclical recovery remains key to monitor given the implications for the relative monetary stance and also for overall risk sentiment. We also continue to monitor capital flow trends in the monthly TIC data for signs of potential persistent improvement in the BBoP, and the budget debate.
S&P GSCI® Industrial Metal IndexS&P GSCI® Agriculture IndexS&P GSCI® Index (rhs)
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The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Euro
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FX Forecasts: We maintain our EUR/$ forecast at 1.45, 1.50 and 1.55 in 3, 6 and 12 months respectively. EUR/¥ is at 118.9, 123.0 and 133.3. Current GSDEER for EUR/$: 1.18.
Motivation for Our FX View: Our EUR/$ forecast reflects the fact that we expect FX markets to remain dominated by broad Dollar weakness, driven by structural imbalances in the form of the large twin deficits in the US, and the divergent monetary policy stances between the Fed and the ECB. On the other side of the coin, Euroland growth remains robust and we continue to expect the Euro-zone crisis to be resolved in a relatively benign fashion (although there may be a few speed-bumps along the road). Euro-zone BBoP fundamentals are also supportive of EUR/$ strength, as opposed to the large US BBoP deficit. These fundamentals should enable the Euro to trade strongly relative to 'fair value' for a protracted period.
Monetary Policy and FX Framework: The ECB is a strict inflation targeter. As a Central Bank serving 17 countries, the ECB is arguably the most independent Central Bank in the world. The Euro is a freely-floating currency. FX policy responsibility is not clearly defined, but in practice the ECB is unlikely to act in FX markets without Eurogroup approval.
Growth/Inflation Outlook: The Euro-zone manufacturing PMI fell sharply in May, but it remains at historically high levels. We expect continued recovery for the Euro-zone as a whole led by the core, while the periphery countries are likely to experience continued weakness. We forecast 2.0% real GDP growth in 2011 followed by 1.7% in 2012 for the Euro-zone. We forecast inflation at 2.8% for 2011 and 2.1% for 2012.
Monetary Policy Forecast: The ECB remained on hold at its June meeting but hinted at a July hike. The tone of its statement remained hawkish, although the forecasts for 2012 were lower than expected. We expect the ECB to hike two more times by 25bp before the end of the year, with the risk of an additional 25bp hike.
Fiscal Policy Outlook: Parts of Europe are heading into substantial fiscal consolidation, the exact effects of which on growth in the Euro-zone remain uncertain. However, the relative fiscal positions between the Euro-zone and the US are what matters for the EUR/$, and the US also faces large adjustment needs of its own that have not yet been addressed.
Balance of Payments Situation: Euroland runs a small current account deficit, which is fully financed by net FDI and net portfolio flows. The key drivers of the real EUR TWI are goods exports, net FDI flows and net equity flows, which point to further EUR appreciation. This stands in contrast to the large BBoP deficit in the US.
Things to Watch: Relative US-Eurozone growth differentials and monetary stances continue to be key, as well as other developments in the periphery, specifically regarding Greece.
Fiona Lake and Constantin Burgi
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The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Euro
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Vol EUR/USD: 3-mth Risk Reversals
5
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Japanese Yen
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81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
$/¥
Spot
GSDEER
FX Forecasts: Our views are unchanged. We expect $/JPY to trade at 82, 82 and 86 in 3, 6 and 12 months. EUR/¥ is at 118.9, 123.0 and 133.3. The current $/¥ GSDEER is 108.3 and EUR/¥ GSDEER is 128.3.
Motivation for Our FX View: We expect the various influences on the Yen (such as Japanese M and A abroad, US-Japanese interest rate differentials and positioning) to continue to keep the currency rangebound, with 82 likely to be close to the top end of that range in the near term. If the Yen were to strengthen significantly in a speedy fashion, we would not be surprised to see further intervention to prevent excessive JPY strength on a TWI basis. The move to 86 on a 12-month horizon reflects the likely move in US rates in anticipation of tightening in 2013.
Monetary Policy and FX Framework: The BoJ has effectively shifted back to a zero interest rate policy. The Yen is formally a freely floating currency, but the MoF is in charge of FX policy and has often intervened in the past. Prior to the recent bilateral intervention in September last year and the co-ordinated intervention in March, the last period of intervention was in 2003-2004.
Growth/Inflation Outlook: The main near-term focus is on how quickly the Japanese economy is recovering from the earthquake. While the latest production data was weaker than expected, production plans look solid, including the transport sector. This is being helped by better news on the power supply front. We are comfortable with our 'v-shaped' recovery view on this basis. Japan will also be affected by developments in the global economy, and the recent slowing in our GLI is a negative for export performance. The strength of the Yen is also likely to weigh on export performance.
Monetary Policy Forecast: The BoJ increased, and extended to June 2012, its Asset Purchase Program by JPY5trn to JPY40trn on March 14 to bolster confidence. It introduced a funds-supplying operation to provide longer-term funds to financial institutions in the disaster area. We expect the BoJ to remain accommodative.
Fiscal Policy Outlook: The fiscal response to the earthquake, including reconstruction assistance, has yet to be determined. So far, a supplementary budget of JPY4trn has been passed and we expect a second of about JPY10trn by July.
Balance of Payments Situation: Japan continues to report trade and current account surpluses, which support JPY strength. However, the trade surplus is being eroded by both the impact of the earthquake - lower exports and reconstruction-related imports - and the strength of the Yen. In terms of capital flows, hedging considerations by Japanese fixed-income investors play an important role and affect the FX relevance of fixed-income-related cross-border flows. Unlike in other countries, bond outflows in recent years have typically coincided with Yen strength.
Things to Watch: Significant Yen strength is likely to be countered by intervention to prevent an unwarranted tightening of financial conditions, and the BoJ is likely to take further steps to keep liquidity abundant. Given that interest rate differentials continue to co-move with $/JPY, US rates are likely to remain a driver of the currency.
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Europe, Middle East & Africa British Pound FX Forecasts: We maintain our EUR/GBP forecasts of 0.90 in 3 and 6 months, and 0.84 in 12 months. Given our EUR/$ forecasts, this translates into GBP/$ at 1.61, 1.67 and 1.85 in 3, 6 and 12 months. Current GSDEER for EUR/GBP is 0.79 and for GBP/$ is 1.51.
Motivation for Our FX View: Sterling is trading at a discount to 'fair value' vs the EUR. However, persistently higher inflation prints have started to erode GBP valuation. Cyclically, the consolidation in fiscal policy combined with an accommodative monetary policy stance is typically negative for FX. Thus, our near-term forecast reflects GBP softness from current levels. The most recent data flow has been softer: PMIs as well as IP have been below expectations, while inflation remained mixed. That said, we still expect the BoE to hike rates in 4Q2010, slightly less dovish than the market pricing. Recent EUR weakness has driven EUR/GBP lower but our forecasts point to a near-term rebound. Broader USD weakness should lead to considerable strength in Cable.
Monetary Policy and FX Framework: The Bank of England is tasked with price stability, defined as CPI at 2% over time. If inflation falls below 1% or rises above 3%, the BoE must write a letter of explanation to the Chancellor of the Exchequer. Sterling operates under an entirely free float, although the BoE occasionally comments on exchange rate developments.
Growth/Inflation Outlook: We are above consensus on UK activity. We expect the economy to grow by 1.9% in 2011 (above consensus at 1.6%) and 2.6% for 2012. PMIs continued to soften in May but still hover at levels consistent with output expansion. Headline CPI remained at high levels but core CPI fell notably in May. The CPI remains far above 3%, partly due to the VAT hike, which is expected to subside in 2012. We expect inflation to average at 4.2%yoy in 2012 before falling to 2.2%yoy in 2012.
Monetary Policy Forecast: The BoE cut rates to 0.5% at its March 2009 meeting and announced the start of quantitative easing. We do not expect an extension of bond purchases beyond the current £200bn. We expect the BoE to hike rates by 25bp in Q4 this year. This is slightly less dovish than current market expectations.
Fiscal Policy Outlook: The new government has set out a plan for an 8% of GDP reduction in the structural deficit and 9% of GDP in the primary structural deficit. Three-quarters of the adjustment will happen via spending cuts, while the change in taxes is minor in comparison.
Balance of Payments Situation: We expect further improvements in the current account balance. Our forecast is for an improvement to -1.8% of GDP for 2011 and -1.7% for 2012, after -2.5% in 2010. Meanwhile, portfolio flows remain notoriously difficult to assess given large gross cross-border flows linked to London as a financial centre.
Things to Watch: The impact of fiscal policy on final demand and the trajectory of the PMI remain the key factors to watch. A sudden change in the Bank of England's stance would be relevant as well.
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80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
EUR/£
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Themos Fiotakis
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91 93 95 97 99 01 03 05 07 09 11
% GDP4-qtr ma
UK: BBoP vs Current Account
CA BBoP
8
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Czech Koruna FX Forecasts: We maintain our EUR/CZK forecasts at 24.20, 23.85 and 23.60 in 3, 6 and 12 months, respectively. This implies a USD/CZK forecast of 16.69, 15.90 and 15.23. Current GSDEER for EUR/CZK is 22.86, equivalent to a 5.4% 'undervaluation' against the EUR. USD/CZK GSDEER is 19.30.
Motivation for Our FX View: We expect the Koruna to follow a long-term appreciation trend, thanks to the trade surplus and the strength of the country's balance sheet, and as growth continues to benefit from the Euro-zone, and especially the German recovery. The balance of payments should continue to support the currency in the longer term. The CNB should remain comfortable with a gradual CZK appreciation, relying on the stronger Koruna to offset higher global commodity prices.
Monetary Policy and FX Framework: The CZK is a freely-floating currency. However, since the economy is very open, the CNB monitors FX movements when setting interest rates. The inflation target is 2%.
Growth/Inflation Outlook: Growth has recovered on strong external demand while domestic consumption has remained depressed. GDP growth reached 2.2% in 2010 and we expect it to accelerate in 2011-12. After picking up in December, inflation surprised on the downside in early 2011 as the effects of higher food and fuel prices started to ease, and a stronger Koruna reduced pressures from higher commodity prices. Headline inflation accelerated again and hit the 2.0% target in May; it is likely to increase further later in 2011 but should remain within the CNB's +1% - +3% target band.
Monetary Policy Forecast: The CNB has kept the policy rate at a record low 0.75% since April 2010, after a total of 300bp in cuts. The absence of strong short-term inflationary pressures will likely allow the CNB to keep rates at 0.75% until late 3Q2011; after that, we expect it to hike rates gradually by a total of 100bp by end-2Q2012.
Fiscal Policy Outlook: The three-party government has expressed its determination to keep the public finances in check and balance the budget in the medium term. Ongoing consolidation is affecting consumer sentiment and has likely dampened the recovery in domestic demand. However, the government is now facing an internal crisis after a series of corruption scandals has weakened the coalition. But even if the risk of early elections were to materialise, we would not expect a turnaround in the fiscal stance, rather less ambitious fiscal targets.
Balance of Payments Situation: The Czech Republic maintains a trade surplus (although the introduction of a new measurement methodology has lowered it), but the income account remains in deficit due to the repatriation of FDI profits. The 2010 current account deficit has narrowed as trade recovered, but should widen in 2011-12 as domestic demand picks up.
Things to Watch: The CNB is likely to start normalising policy rates in late 3Q2011, and lift rates in gradual, well-spaced hikes. In the meantime, we expect the CNB to monitor the impact of an already negative interest rate differential on the CZK; currency weakness may prompt it to start hiking sooner rather than later.
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Hungarian Forint FX Forecasts: We are keeping our EUR/HUF forecasts at 269 in 3 months, and 271 in 6 and 12 months. This implies USD/HUF at 185.5, 180.7 and 174.8 in 3, 6 and 12 months. Current GSDEER for EUR/HUF is 279.6, which implies a 5.6% 'overvaluation' against the Euro. USD/HUF GSDEER is 236.1.
Motivation for Our FX View: The HUF has strengthened recently given generally positive external conditions and the announcement of the fiscal savings plan, and as the near-term sovereign credit risk has declined thanks to the government's lower refinancing needs. We expect this positive assessment of Hungary risk to prevail and continue to support the currency. However, in the medium term, the continued repayment of FX loans, combined with planned fiscal austerity measures and relatively accommodative monetary policy, will likely cap currency appreciation. The Forint will remain vulnerable to developments in global risk appetite and domestic news, especially regarding the NBH's independence and long-term fiscal prospects.
Monetary Policy and FX Framework: The NBH targets inflation at 3% in the medium term (18 months-2 years). Until end-2011, the Bank will hold rate-setting meetings every fourth Tuesday of the month.
Growth/Inflation Outlook: Growth reached 1.2% in 2010 and should pick up in 2011-12. Inflation is likely to stay above the NBH's target until end-2012, as higher food and energy prices, and the effects of 'crisis' taxes, push up headline inflation.
Monetary Policy Forecast: A deteriorated inflation outlook, together with higher risk premia, has prompted three 25bp rate hikes. With inflation firmly above the target, and weak prospects for domestic consumption, we expect the MPC to stay on hold for the rest of 2011. However, the new MPC could be more inclined to ease the stance if conditions permit, especially if the effects of earlier price shocks start to wane or growth softens. The strongest deterrent against this would be the HUF level itself, with stronger HUF reducing the FX debt burden.
Fiscal Policy Outlook: The Fidesz government plans to limit deficits in 2011-12 with the use of special 'crisis' taxes and the sale of private pension assets; these would finance substantial tax cuts. To avoid destabilising public finances in the medium term, the government will implement an ambitious fiscal plan involving expenditure cuts and structural measures. The legal framework is still being put in place, but the announcement indicated a shift to a more conservative approach to fiscal policy. The new constitution approved in April introduces a 50%-of-GDP limit on public debt; however, a new Public Finance Act, which would complete the fiscal rule, is not in place yet.
Balance of Payments Situation: The current account should remain in surplus in 2011; the deficit will likely rise only in 2012 as domestic demand slowly recovers. Repayments of FX-denominated debt will put pressure on the financial account.
Things to Watch: Four new, government-selected MPC members were appointed in early 2011 under a new procedure and parliament plans to rewrite the NBH law yet again. The uncertainty surrounding possible changes to the NBH statute - especially rules for appointing a governor and their deputies - could reignite concerns over the MPC's independence.
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Israeli Shekel FX Forecasts: We maintain our 3-, 6- and 12-month forecasts for $/ILS at 3.50, 3.37 and 3.30. This implies €/ILS at 5.08, 5.06 and 5.12 in 3, 6 and 12 months respectively. The current $/ILS GSDEER is 4.21 and €/ILS GSDEER is 4.98.
Motivation for Our FX View: We maintain our constructive ILS views, showing steady appreciation on the back of widening demand and interest rate differentials, a more hawkish shift in monetary policy (with the BoI stepping up the pace of rate hikes) and an external position that remains positive, albeit below pre-crisis cyclical peaks.
Monetary Policy and FX Framework: The Bank of Israel enjoys operational independence and targets inflation of 1%-3%yoy. Previously, on the MPC's recommendation, the governor set the policy interest rate with a view to keeping inflation within the target band. However, from July 2010, the new BoI law has given full authority to the MPC.
Growth/Inflation Outlook: Domestic financial conditions remain supportive of growth and steady demand recovery in major export markets (most notably the US) should lead to stronger net export growth. We expect annual growth to remain above trend, at 4.2% - 4.4% in 2011 and 2012, but we recognise the downside risks implied by the recent developments in Egypt and a loss of global growth momentum. On the inflation front, intensifying demand- and supply-side inflation pressures have led to a significant inflation overshoot, with headline CPI accelerating to 4.0%. We expect headline CPI to rise slightly further, peaking mid-year, before gradually returning to the upper boundary of the 1%-3% BoI target range by around end-year.
Monetary Policy Forecast: Since the start of the year, the BoI has increased the pace of tightening in an effort to control inflation and keep inflation expectations appropriately anchored. We continue to expect the BoI to take rates to 4.25% by end-2011 and 5.25% by end-2012, from the current 3.25%. The risks to this forecast are balanced. Falling commodity prices, softer global growth and continuing Middle East uncertainty pose downside risks, while robust domestic demand continues to generate inflationary pressures.
Fiscal Policy Outlook: The budget deficit widened to 4.5% of GDP in 2009, due mainly to the economic slowdown. However, the government has taken a number of corrective measures and, as the economy recovers from recession, the nominal deficit should fall to around 2.5% of GDP by 2012.
Balance of Payments Situation: The current account surplus has been moderating, consistent with strong domestic absorption and has come down to around 1% of GDP from around 3.5% at the beginning of 2010. However, the surplus is likely to stabilise at current levels, consistent with our constructive global growth forecasts and the (expected) slowdown in domestic demand. The main risk would be a more aggressive increase in energy prices, which could dampen the external surplus (both through the terms of trade and external demand channels).
Things to Watch: Ongoing political developments across the Middle East and North Africa are relevant for Israel and need to be monitored closely. Also, Iran's nuclear program poses additional longer-term risks.
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97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
$/ILS
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Ahmet Akarli
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96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
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Israel: BBoP vs Current Account
CA BBoP
11
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Norwegian Kroner FX Forecasts: We have not changed our EUR/NOK forecasts and expect the cross to trade at 7.70, 7.70 and 7.60 in 3, 6 and 12 months. This equates to 5.31, 5.13 and 4.90 for the USD/NOK rate. The NOK looks 'cheap' vs the Euro at current levels, according to a GSDEER valuation of 5.81, reflecting Norway's terms-of-trade gains. However, because Norway keeps the bulk of its oil revenues offshore, the Norwegian Kroner is unlikely to erode this undervaluation substantially. USD/NOK GSDEER is 4.90.
Motivation for Our FX View: The Norwegian Kroner has traded in a relatively wide range in the year so far, between 7.70 and 7.95. High oil prices have helped offset adverse interest rate differentials to keep the cross rangebound. We continue to expect NOK appreciation from here on the back of solid growth, rising interest rates and supportive oil prices. The question remains how much FX strength Norges Bank is willing to tolerate from here. We introduced a recommended Top trade to be short USD/NOK on the back of our oil price forecasts.
Monetary Policy and FX Framework: Norges Bank is a flexible inflation targeter, balancing inflation and growth. The target is consumer price inflation close to 2.5% over time. The FX regime is a free float.
Growth/Inflation Outlook: The PMI remains on an upward trajectory, but is still far from its pre-crisis levels, in contrast to many other countries in Europe. This probably prevented it from falling sharply in May. Thus far, Norway's recovery from the Global Financial Crisis has been relatively sluggish, possibly reflecting the fact that Norway did not fall far in the first place. Household consumption remains weak, reflecting the sluggishness of the labour market. However, survey-based measures suggest a pick-up ahead. We think the mainland economy will expand by 2.8% this year and 2.4% next. With still relatively easy monetary policy, we expect consumption to be the key contributor to growth, and a strong global recovery should help mainland business. With Brent still elevated, offshore investment is likely to be solid and have positive spillover effects on the mainland. Core inflation is set to pick up over the next two years from muted levels at present.
Monetary Policy Forecast: Norges Bank resumed tightening at the May meeting with a 25bp hike after 12 months on hold. We expect the Bank to hike rates to 2.75% by end-2011 and to 3.75% by end-2012.
Fiscal Policy Outlook: The fiscal spending rule aims to limit the use of oil revenues to the return on the Government Pension Fund-Global. The non-oil budget deficit is expected to be 6.6% of GDP for 2011 and the structural deficit +6.3%.
Balance of Payments Situation: As the world's fifth-largest oil exporter, Norway enjoys a healthy current account surplus due to exports of oil; the increase in oil prices has raised the current account surplus from 11.2% of GDP to 14.1% in recent quarters. Norway runs a large BBoP surplus due to strong FDI and portfolio inflows.
Things to Watch: Notable NOK appreciation is likely to generate a more voluble response from Norges Bank.
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Polish Zloty FX Forecasts: We keep our EUR/PLN forecasts at 3.96, 3.96 and 3.93 in 3, 6 and 12 months. Given our USD/EUR forecast, this implies USD/PLN at 2.73, 2.64 and 2.54 in 3, 6 and 12 months, respectively. Current GSDEER for EUR/PLN is 3.57, indicating a 9.1% undervaluation against the Euro. USD/PLN GSDEER is 3.02.
Motivation for Our FX View: We see the PLN staying on a fairly flat path in the near term. Our forecast reflects risks stemming from a wider CA deficit and uncertainty surrounding the revisions of large net errors and omissions, but with the downside limited by the government's presence in the FX market and expectations of additional rate hikes later in 2011. That said, in the longer term, the PLN should appreciate thanks to capital inflows attracted by good growth prospects and the privatisation process, and a generally favourable global background. The main risk to the PLN would come from a reversal in demand for EM assets.
Monetary Policy and FX Framework: The PLN is a freely-floating currency. That said, the authorities are now selling EU funds in the spot FX market, also to limit depreciation risks. The capital market is fully liberalised and the NBP maintains an inflation target of +2.5% (+/- 1%).
Growth/Inflation Outlook: The economy has grown strongly, at 3.8% in 2010, supported initially by external and later predominantly strong domestic demand; growth should accelerate in 2011, to 4.3%; investments should also start to recover. Inflation exceeded the upper band of the NBP's target (2.5% +/- 1%) in January, and rose to 4.5% in April, mostly on supply-side shocks; core has also accelerated and inflation expectations have deteriorated substantially. Inflation is likely to peak in mid-2011 and stay above the NBP target until end-2012.
Monetary Policy Forecast: The MPC has hiked the policy rate by 100bp since January. We expect a further 50bp in hikes, bringing the policy rate to 5.0% by 1Q2012.
Balance of Payments Situation: The current account deficit narrowed dramatically in 2009 but in 2010 the adjustment reversed and the deficit widened. Similarly, the broad balance of payments remained PLN-supportive but has now weakened. As domestic demand recovers, the current account deficit is likely to deepen. International reserves have increased to EUR75bn, and any tail risks are limited by the outstanding Flexible Credit Line from the IMF.
Fiscal Situation: The growth slowdown has led to a significant deterioration in public finances. With parliamentary elections scheduled for October, the government has decided to pursue gradual fiscal consolidation, supported by a diversion of two-thirds of contributions to the private pension funds towards the public pension system. The outlook for the 2011 budget is positive, thanks to solid budget execution so far and an unexpectedly large transfer of profits from the NBP. The cyclical upturn is also supporting tax revenues.
Things to Watch: Revisions of errors and omissions in the BoP are planned for June 29, with subsequent revisions to the CA deficit and net exports possible. Uncertainty about the extent of these may weigh on the PLN in the near term.
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Russian Ruble FX Forecasts: We have rolled our Ruble forecast forward and see the RUB at 33.5, 32.0 and 31.5 against the basket in 3, 6 and 12 months. This implies USD/RUB at 27.7, 26.0 and 25.3. The current GSDEER value for USD/RUB is 35.50 and EUR/RUB is 42.04.
Motivation for Our FX View: We believe that domestic demand, and investment in particular, will accelerate throughout the year, helped by more expansionary fiscal policy. We expect the output gap to close in 2H2011, increasing the need for policy tightening. Given the structural shift in the monetary policy framework, we expect the policy rate (deposit) to rise by 100bp to year-end, supporting capital inflows and increasing the pressure on the RUB to appreciate.
Monetary Policy and FX Framework: The monetary policy framework has shifted towards more FX flexibility and a greater focus on inflation. The CBR's intervention band against the USD0.55 + EUR0.45 basket stands at RUB5, and is now RUB32.45-37.45. It shifts by RUB0.05 each time the CBR spends US$650mn intervening. We expect the CBR to expand its band by RUB1 at least once in the autumn. The CBR is attempting to shift towards interest rates as its primary monetary policy tool, and has scaled down its presence in the FX market. In order to do this, as liquidity tightens, we believe the CBR will need to narrow the corridor between its repo and deposit rates, and we think it will do this by keeping its repo rate on hold until 4Q2011.
Growth/Inflation Outlook: Russia's 2010 recovery remains unimpressive at +4.1% in Q1 after the 4% growth in 2010. We expect growth to accelerate in 2H2011, driven by a rebound in investment, with GDP averaging +5.3% in 2011 and +5.6% in 2012. With food price inflation having stabilised, we expect inflation to remain around 9.5% until July; base effects in food are then likely to bring about a decline in headline inflation to 7.3% by year-end, even as demand pressure on core inflation intensifies.
Monetary Policy Forecast: The CBR emphasises the supply-side nature of the recent rise in inflation, although it continues to monitor the monetary risks. The CBR estimated the output gap in 2010 at 1.5% and thus any acceleration in growth from current levels will require significant monetary tightening to avoid an overheating in 2012. We now expect a cumulative 100bp of hikes to the deposit rate, and 50bp to the repo rate over 2011.
Fiscal Policy Outlook: Rising oil prices should help to bring the federal budget to a surplus of 0.5% of GDP in 2011, and to 2% of GDP in 2012.
Balance of Payments Situation: Based on our Commodity Strategists' positive view on oil prices, we expect the current account to accumulate a surplus of 4.5% of GDP in 2011, and to 3.5% in 2012.
Things to Watch: Who will run for President in 2012 and when this will become apparent. We will also monitor closely to see whether the CBR remains committed to controlling inflation through interest rates, while allowing a higher degree of flexibility to the exchange rate.
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
South African Rand FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/ZAR at 7.00, 6.80 and 6.45. This implies €/ZAR at 10.15, 10.20 and 10.00 in 3, 6 and 12 months respectively. The current $/ZAR GSDEER is 6.22 and €/ZAR GSDEER is 7.37
Motivation for Our FX View: Our short-term cautiousness is due mainly to the fact that the economy is still well below potential, inflation remains muted and the SARB is still reinforcing a fairly accommodative policy stance. However, inflation risks appear to be increasing (particularly from food and energy prices) and, over the medium term, we expect the ZAR to start performing better in response to a more hawkish stance by the SARB and, eventually, greater monetary policy tightening.
Monetary Policy and FX Framework: The South African Reserve Bank is operationally independent and sets its policy rate to keep CPI inflation within the official target of 3%-6%yoy and, secondarily, to support growth and promote financial stability. The key policy rate is the 2-week repo rate.
Growth/Inflation Outlook: Following an extended soft patch in mid-2010, growth bounced back in 4Q2010, bringing overall annual growth to 2.8%. Further acceleration was seen in 1Q2011, with growth rising to 4.8% (ann). With gradual recovery in the labour market and some acceleration in domestic credit growth, we expect domestic demand to recover momentum, and pent-up private investment and consumption to continue to materialise over 2011. Accordingly, we see GDP growth accelerating to 3.8% in 2011 and further to 4.2% in 2012. However, in the near term, the loss of domestic and global growth momentum, signalled by our leading indicators, also points to a marked downside growth risk over the next few quarters. Inflation remains quite benign for now, at +4.2%yoy, and mainly driven by external cost-push factors, while core inflation remains around 3.0%-3.5%yoy.
Monetary Policy Forecast: We expect the SARB to remain on hold throughout most of 2011, as the disinflationary effects of the output gap check core inflationary pressures. Subsequently, as the domestic demand recovery becomes better entrenched we see gradually rising core inflation and some required normalisation. Accordingly, we expect 50bp of hikes in 4Q2011 and a further 200bp over 2012, bringing the policy rate to 8.0%.
Fiscal Policy Outlook: The nominal budget deficit widened to 6.7% of GDP in fiscal year 2009/10, due to the sharp slowdown in economic activity and moderate government stimulus. The deficit narrowed to 5.3% of GDP in 2010; due to increased spending plans for 2011 (particularly in employment-related programs), the deficit should remain near this level, before falling to around 4.9% in 2012.
Balance of Payments Situation: The current account deficit narrowed sharply to -0.6% in 4Q2010. Stronger domestic absorption over 2011 may put renewed widening pressure on the trade balance, particularly in 2H2011. That said, we do not foresee any major financing issues, as debt and equity inflows should be enough to comfortably finance the deficit.
Things to Watch: Given the still relatively weak cyclical picture and recent global growth concerns, ZAR performance will continue to be dependent on portfolio and equity flows in the short term.
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South Africa: BBoP vs Current Account
CA BBoP
Ahmet Akarli and Michael Hinds
15
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Swedish Krona
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EUR/SEK
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% GDP4-qtr ma
Sweden: BBoP vs Current Account
CA BBoP
FX Forecasts: We have not changed our view. We expect EUR/SEK to trade at 8.70, 8.60 and 8.60 in 3, 6 and 12 months. This equates to a USD/SEK rate of 6.00, 5.73 and 5.55. Current GSDEER for EUR/SEK is 8.19 and for USD/SEK is 6.91.
Motivation for Our FX View: The Swedish Krona weakened a touch in early March and has essentially stayed weaker over the past two months. This reflects developments in interest rate differentials, although current spot for EURSEK is higher than interest rates suggest it should be. That said, expectations of a strong recovery and continued monetary tightening continue to underpin our bullish SEK views, as does Sweden's positive external balance. The Riksbank's caution over currency strength has been a headwind for the currency at various points recently, and may continue to be on any move deemed excessive. Adverse news on the European sovereign situation has the potential to weaken the SEK in the near term.
Monetary Policy and FX Framework: A flexible inflation targeter, responding to output fluctuations over and above what they imply for future inflation. The Riksbank's objective is to keep CPI inflation at around 2%. CPIX has been the Riksbank's effective target, but it has announced that this measure will be phased out and CPI will likely become the key focus of attention. A flexible FX regime.
Growth/Inflation Outlook: As elsewhere, the Swedish PMI dropped sharply in May, continuing its slide since its high of 66 last spring; however, at 56.1 the level is still in growth territory. IP remains solid, although manufacturing orders have softened a shade. Export momentum has also dropped and the trade surplus remains below its previous highs. Retail sales, however, remain somewhat lacklustre, despite the improvement in the labour market. Unemployment has fallen to 7.7% from close to 9% through 2009. We expect GDP growth to rise by 4.6% in 2011 and by 3.2% in 2012. Given that the Swedish economy is a high beta to global growth, this should underpin a stronger SEK. We expect inflationary pressures to build somewhat from current levels and expect headline inflation to average 2.8% in 2011.
Monetary Policy Outlook: The Riksbank hiked rates by 25bp in April, in line with expectations. The Bank's path for the repo rate remained unchanged, as did its view of Sweden's economic prospects. We remain more hawkish and see the repo rate at 2.75% by end-2011 and 3.75% by end-2012.
Fiscal Policy Outlook: We expect the general government deficit to be 0.3% of GDP in 2010. The 2011 budget proposal implies a discretionary fiscal policy tightening of 0.4% of GDP.
Balance of Payments Situation: On a trend basis, Sweden's current account surplus remains relatively robust at 6.5% of GDP. The BBoP surplus stands at 5.0% of GDP on a trend basis, which is lower than the 20% surplus a couple of quarters ago. Other things equal, the BBoP surplus is positive for the SEK.
Things to Watch: The Riksbank's views of currency strength.
Fiona Lake
16
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Swiss Franc FX Forecasts: We have changed our view and expect EUR/CHF to trade at 1.23, 1.23 and 1.25 in 3, 6 and 12 months, from 1.30, 1.30 and 1.33 previously. This equates to USD/CHF at 0.85, 0.82 and 0.81. EUR/CHF GSDEER is 1.43 and USD/CHF GSDEER is 1.20.
Motivation for Our FX View: The Swiss Franc has strengthened persistently since early April vs the Euro, reflecting a combination of broader market risk aversion due to European sovereign issues and concerns over the global slowdown. Our forecast changes recognise that these factors have caused the CHF to strengthen beyond our previous path and the fact that these issues, particularly the European sovereign issue, could keep the CHF stronger for longer. However, the CHF is likely to weaken once the European sovereign issue is resolved.
Monetary Policy and FX Framework: The SNB targets inflation, with a ceiling on CPI set at less than 2% pa. The SNB uses 3-month libor as its policy instrument. At each meeting, the Bank sets a band, usually 1%, for libor. The Bank then manages libor so that it trades at the centre of the band. The CHF is fully flexible in normal times; however, the SNB occasionally directly influences the value of the currency when it poses a threat to inflation stability. Most recently, the SNB intervened heavily to stop CHF appreciation last May, at the peak of the Euro-zone crisis, but has since remained on the sidelines.
Growth/Inflation Outlook: The Swiss PMI was one of the few business surveys to rise in May, possibly reflecting the fact that the series had fallen sharply late last year. Despite the drop, the current level remains elevated compared with history. The KoF also continues to look solid, pointing to an ongoing recovery. That said, Switzerland is one of the few countries where the level of exports have not surpassed their pre-crisis levels, suggesting that CHF strength is having an impact. Retail sales have rebounded recently, in line with the continued strength of the labour market. Headline inflation remains muted.
Monetary Policy Forecast: The SNB was less dovish at the March meeting, and revised up its near-term inflation path on the back of higher commodity prices. The Bank upgraded its growth forecasts but still expects growth to moderate in coming quarters and remains concerned about the ongoing strength of the Swiss Franc. We expect the SNB to hike rates to 0.75% by end-2011, with the first hike coming in September, and rates to end 2012 at 2.75%.
Fiscal Policy Outlook: Switzerland has a relatively low debt to GDP ratio and we forecast a small budget deficit of -0.3% of GDP this year.
Balance of Payments Situation: The current account position staged a sharp recovery in the latest data owing to a recovery in investment income. However, Switzerland reported large FDI outflows in the same period, pushing the narrow basic balance into deficit. Switzerland's portfolio flow data is complicated by its position as an international financial centre.
Things to Watch: The SNB's rhetoric on the CHF, together with any continued spillover from Euroland sovereign risk into CHF strength.
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
EUR/CHF
Spot
GSDEER
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
00 01 02 03 04 05 06 07 08 09 10 11
% GDP4-qtr ma
Switzerland: BBoP vs Current Account
CA BBoP
Fiona Lake
17
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Turkish Lira FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/TRY at 1.65, 1.57 and 1.47. This implies €/TRY at 2.39, 2.36 and 2.28 in 3, 6 and 12 months. The current $/TRY GSDEER is 2.11 and €/TRY GSDEER is 2.50.
Motivation for Our FX View: We remain short-term bearish on the TRY, reflecting the large current account deficit and the fact that (despite more aggressive macro-prudential measures recently) the CBRT is still in the very early stages of a tightening cycle. However, we subsequently expect the TRY to start performing better, in response to accelerating inflation and a more hawkish shift in the overall policy framework.
Monetary Policy and FX Framework: The CBRT formally adopted inflation targeting in 2006, and missed its 4% target by a wide margin in both 2006 and 2007, due to a series of supply-side shocks. The Bank has revised its medium-term targets upwards to 7.5% for 2009, 6.5% for 2010 and 5.5% for 2011. The Bank's 2012 target is 5%.
Growth/Inflation Outlook: Real GDP growth reached 8.9% in 2010, in part thanks to a robust fourth quarter. We expect above-trend growth of around 6.4% in 2011 and 4% in 2012. Inflation took a broad-based jump in May, to 7.2%yoy, despite favourable base effects. Core inflation has also been rising in recent months, reaching around 5%yoy. We now expect inflation to reach 8.2% by end-2011 as inflation momentum remains high (despite some recent moderations) and base effects continue to push annual inflation higher. By end-2012 we see headline CPI falling to around 6.6%, in response to (forecast) monetary tightening and subsequent TRY appreciation.
Monetary Policy Forecast: The CBRT is following an unorthodox policy approach, attempting to limit domestic credit growth and narrow the current account deficit. Uncertainty in monetary policy remains high and will depend on the strength of capital inflows and domestic demand, as well as movements in TRY exchange rates. We continue to expect rates to rise to 7.25% by end-year, from 6.25% currently, but see a risk of more front-loaded hikes.
Fiscal Policy Outlook: Following a widening to 5.5% of GDP in 2009, the government introduced corrective measures late last year and the deficit fell to slightly below 4% of GDP in 2010. Fiscal policy is likely to remain relatively well anchored throughout 2011 and 2012. In the run-up to the June 2011 parliamentary elections the government continued to increase current and investment spending. However, healthy revenues - boosted by robust domestic activity and 'one-off' items - should bring the nominal deficit down to 2% by 2012.
Balance of Payments Situation: The current account deficit widened to 6.4% in 2010 and is currently running close to 11% of GDP (Q1 sa. annualized). The CBRT's policy actions should help to correct the imbalance but the deficit is likely to remain large.
Things to Watch: Significant monetary and fiscal policy adjustment is needed to make a significant impact on narrowing the current account deficit and checking inflation. A failure to shift policy in a timely manner could leave the TRY more vulnerable to external shocks.
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Americas Argentine Peso FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/ARS forecasts at 4.15, 4.25 and 4.50. This implies €/ARS at 6.02, 6.38 and 6.98 in 3, 6, and 12 months respectively. The current $/ARS GSDEER is 2.92 and €/ARS GSDEER is 3.45. Our valuation model uses the official inflation index, which is thought to have significantly underestimated actual inflation since 2007. If the higher non-government inflation estimates are used, the undervaluation of the ARS virtually disappears.
Motivation for Our FX View: The ARS weakened 4.3% against the USD in 2010, but consumer prices rose an estimated 27%. So far this year the ARS/USD has depreciated 3.0% (well below accumulated inflation). We expect the authorities to allow for moderate ARS depreciation until the October elections (below the expected 20%-plus increase in inflation) as the exchange rate is used as the main nominal anchor to prevent further escalation of inflationary pressures. Hence, the authorities are tolerating real exchange appreciation ahead the elections given the concern that faster nominal depreciation would cause even more inflation, and/or lead to renewed capital flight. The loss of external competitiveness during 2010-11 will likely lead to a faster depreciation drift after the elections.
Monetary Policy and FX Framework: The Central Bank conducts monetary policy by setting quantitative targets on M2. The Bank approved a lax monetary program for 2011 (an electoral year) - the M2 growth target was set at a high 27.9% (±4.0%). The Central Bank intervenes heavily in FX markets. The Bank mops up the excess liquidity by issuing short-term bonds (Lebacs/Nobacs).
Growth/Inflation Outlook: Real GDP grew a solid 9.2% in 2010 on the back of a supportive external backdrop, the normalisation of agricultural production, and overly stimulative fiscal and monetary stimulus. We expect real GDP to grow 6.8% in 2011 (risk on the upside). The government is thought to continue to under-report inflation: official figures show headline inflation at 9.7%yoy in April while non-government estimates put headline inflation at 20%-plus.
Monetary Policy Forecast: The Central Bank has a weak record of inflation control, and monetary policy remains strongly subordinated to fiscal priorities. The Bank will transfer US$9.6bn in reserves to the government in 2011 (following a US$6.6bn transfer in 2010).
Fiscal Policy Outlook: Fiscal policy remains strongly pro-cyclical. The government posted a 1.8% of GDP primary surplus in 2011 (consistent with overall fiscal balance) and should deliver a primary surplus of around 1.5% of GDP in 2011. Cyclically adjusted, the fiscal stance is lax.
Balance of Payments Situation: The current account remains well anchored but the trade surplus has been gradually eroding. The trade surplus declined from US$18.5bn in 2009 to US$14.7bn in 2010 as higher export proceeds (due to higher prices and volumes) were offset by a significant increase in imports. The current account posted a 1% of GDP surplus in 2010; down from 3.6% of GDP in 2009) and will likely post a small deficit in 2011.
Things to Watch: The negotiations with the Paris Club and the political dynamics ahead of the October 2011 presidential elections.
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Brazilian Real
FX Forecast: We are maintaining our 3-, 6- and 12-month forecasts for $/BRL at 1.55, 1.60 and 1.70. We are also maintaining our 3-month forecast range for $/BRL at 1.50-1.70. This implies €/BRL at 2.25, 2.40 and 2.64 in 3, 6 and 12 months respectively. The current $/BRL GSDEER is 2.59 and €/BRL GSDEER is 3.06.
Motivation for Our FX View: We believe that the BRL will remain strong in 2011 for three reasons: (1) global liquidity is likely to remain high, bringing large capital inflows to Brazil; (2) our Global Markets team forecasts that the USD will continue to weaken; and (3) commodity prices should help Brazil to maintain strong terms of trade. However, lower capital inflows and a wider current account deficit could eventually weaken the BRL from 12 months and beyond.
Monetary Policy and FX Framework: Since 1999, BACEN has pursued an inflation targeting regime. For 2010, 2011 and 2012, the IPCA inflation target is set at 4.5% +/- 2.0%. To this end, COPOM targets the interest rate, SELIC. Brazil has a managed floating FX regime, marked by large, frequent and discretionary intervention in the spot and derivatives FX markets.
Growth/Inflation Outlook: After rebounding to 1.3% (qoq sa) in 1Q2011, we expect real GDP growth to slow to 1.2% in 1Q2011 (qoq sa). Tighter monetary policy and less expansionary fiscal policies should moderate real GDP growth to 4.5% in 2011 from 7.5% in 2010. We expect IPCA inflation (yoy) to rise to 6.5% in December 2011 from 5.9% in 2010.
Monetary Policy Forecast: In December 2010, BACEN increased reserve requirements and imposed tighter prudential measures to curb the growth of credit to consumers. In the year through June 2011, COPOM raised SELIC by a total of 150bp. We forecast that COPOM will hike SELIC four more times, by 25bp per meeting, to 13.25% in December 2011. The risk to this forecast is that COPOM could hike just three times, i.e., not hike in December. It is likely that COPOM will continue to implement more macroprudential measures.
Fiscal Policy Situation: Over the past two years, fiscal policy has been expansionary, driven by a large increase in current spending, chiefly due to payroll and social programs. The Rousseff administration has announced budgetary cuts (with a headline number of 1.25% of GDP) to reduce the pace of growth in current spending. Together with record-high tax revenue collection, the primary fiscal position improved by 1.0 percentage points of GDP in the year through April.
Balance of Payments Situation: We forecast that the current account deficit will widen to US$59bn in 2011 from US$47.5bn in 2010, driven by a larger deficit in services, higher dividend remittances, and a small decline in the trade surplus. We expect capital inflows to surge to US$130.0bn in 2011. We forecast that the BoP surplus will rise to US$71bn in 2011 from US$50.1bn in 2010, shifting to a deficit of US$10.0bn in 2012.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
92 94 96 98 00 02 04 06 08 10
$/BRL
Spot
GSDEER
-6%
-4%
-2%
0%
2%
4%
6%
8%
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
% GDP4-qtr ma Brazil: BBoP vs Current Account
CA BBoP
Paulo Leme
20
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Canadian Dollar FX Forecasts: We maintain our $/CAD forecast at 0.96, 0.94 and 0.92 on a 3-, 6- and 12-month horizon. This implies EUR/CAD at 1.39, 1.41 and 1.43 in 3, 6 and 12 months. The current GSDEER for $/CAD is 1.14 and EUR/CAD GSDEER is 1.36.
Motivation for Our FX View: The Canadian economy is closely linked to the US cycle. While Q1 GDP was sluggish, Q2 is still set to be solid and that would be positive for the economy and for the CAD. In addition, a solid outlook for commodities and a relatively constructive global growth outlook are likely to benefit the currency. On the other side of the equation, we continue to expect broad Dollar weakness due to persistently wide twin deficits. The Dollar will also continue to be weighed on by the Fed's monetary stance relative to elsewhere, as we do not expect Fed hikes for the next two years.
Monetary Policy and FX Framework: The Bank of Canada (BoC) operates an inflation targeting regime (2% within a 1%-3% range), with a generally flexible stance on the currency. In the past, the BoC has only commented on FX during periods of disruptive FX price action in terms of levels and/or the speed of a move.
Growth/Inflation Outlook: Canadian growth forecasts are at 3.0% for 2011 and 3.3% for 2012, above consensus. On inflation, we expect inflationary pressures to remain subdued, with key core inflation measures remaining below 2% through 2012.
Monetary Policy Forecast: The BoC remained on hold in May, but gave a clear signal that tightening is on the agenda in the coming months, albeit probably not at the next meeting. We still expect the Bank of Canada to restart its rate hike cycle in 4Q2011, but with some risks skewed to the earlier side. This view rests in part on Canadian inflation measures remaining subdued through the year and an accommodative US monetary policy stance.
Fiscal Policy: In the 2011 budget announcement, the deficit for the fiscal year 2010-2011 was lowered by about 10% to C$ 36.2bn. The announced budget for 2011-2012 stands at a deficit of C$32.3bn and should be reduced gradually in coming years. Temporary elements of the stimulus package (Canada's Economic Action Plan) conclude in the current fiscal year and plans call for restrained spending growth over the next few years.
Balance of Payments Situation: The current account balance remains in deficit, although this has been largely offset by strong portfolio inflows, leaving the Broad Balance of Payments (BBoP) picture in Canada relatively healthy at present.
Things to Watch: The cyclical domestic growth momentum continues to be an important factor, in addition to the high level of exposure to the US business cycle. We are also watching the main drivers of the CAD, including risk sentiment and the oil outlook.
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
US Dollar/Canadian Dollar
Spot
GSDEER
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
90 92 94 96 98 00 02 04 06 08 10
% GDP4-qtr ma
Canada: BBoP vs Current Account
CA BBoP
Fiona Lake and Constantin Burgi
21
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Chilean Peso FX Forecasts: We revise our 3-, 6- and 12-month forecasts for $/CLP to a flat 460 from 470, 470 and 465. This implies €/CLP at 667, 690 and 713 in 3, 6 and 12 months respectively. The current $/CLP GSDEER is 422 and €/CLP GSDEER is 500.
Motivation for Our FX View: The Central Bank announced on January 3 a US$12bn reserve accumulation program to be carried out throughout 2011 (US$50mn/day). Vigorous double-digit domestic demand growth, firm terms of trade, a widening domestic-foreign interest rate differential and a weaker USD in global markets should continue to support the CLP.
Monetary Policy and FX Framework: The Central Bank targets inflation (3.0%±1.0%) under a free-floating FX regime. FX market intervention happens seldom and only under exceptional circumstances. Disciplined rules-based fiscal execution provides extra degrees of freedom to calibrate monetary policy.
Growth/Inflation Outlook: Despite the February 2010 earthquake, the economy managed to grow a solid 5.2% in 2010 supported by the buoyant 16.4% expansion of domestic demand driven by strong investment spending (+18.8%) and private consumption (+10.4%). We expect real GDP growth to accelerate to 6.6% in 2011 on the back of firming credit flows, an expansion of the real wage bill (employment gains and real wage increases), strong terms of trade, reconstruction spending following the earthquake, and a low statistical base for real GDP during 1Q2011 due to the activity disruptions caused by last year's earthquake. The inflation dynamics have been benign, with core inflation (2.5%yoy) still below the 3.0% midpoint of the inflation target band. The output gap has closed and the economy is operating at around full employment.
Monetary Policy Forecast: Domestic demand conditions remain strong (double-digit growth during 1Q2011). Medium-term inflation expectations have realigned towards the 3.0% inflation target midpoint. We expect the Central Bank to continue to normalise monetary conditions at a gradual pace, with likely tactical pauses, and to take the policy rate to a broadly neutral 6.00% by end-2011.
Fiscal Policy Outlook: Fiscal execution remains counter-cyclical. Given the strong cyclical economic rebound and higher commodity prices, the fiscal balance improved to -0.4% of GDP in 2010 from -4.4% of GDP in 2009. We expect the fiscal balance to move into a +2.8% of GDP surplus in 2011.
Balance of Payments Situation: The trade balance continues to deliver solid surpluses as firmer terms of trade offset the large increase in imports. The trade balance posted a solid US$15.9bn surplus in 2010 (7.8% of GDP) and the current account closed the year with a 1.9% of GDP surplus. We expect imports to remain strong during 2011 on the back of exuberant domestic demand growth and higher oil prices. However, firm copper prices should take the trade surplus to around US$15.5bn in 2011 (6.3% of projected 2011 GDP), with a current account surplus of 0.8% of GDP.
Things to Watch: The effectiveness of the large FX intervention program and the monetary policy normalisation cycle.
0
100
200
300
400
500
600
700
800
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
$/CLP
Spot
GSDEER
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
% GDP4-qtr ma Chile: BBoP vs Current Account
CA BBoP
Alberto M. Ramos
22
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Colombian Peso FX Forecasts: We revise our 3-, 6- and 12-month forecasts for $/COP to 1,750, 1,750 and 1,800 from 1,800, 1,800 and 1,850.This implies €/COP at 2,538, 2,625 and 2,790 in 3, 6 and 12 months respectively. The current $/COP GSDEER is 2,100 and €/COP GSDEER is 2,487.
Motivation for Our FX View: Strengthening domestic demand conditions, solid FDI flows, terms of trade gains and a widening domestic-foreign interest rate differential support the COP outlook. The Central Bank resumed spot market intervention in September 2010 (at least US$20mn/daily until at least end-September 2011).
Monetary Policy and FX Framework: The Central Bank targets inflation (3.0%±1.0%) under a managed-float FX regime but has in the past intervened in the spot FX market, including through different forms of capital controls, to prevent excessive COP volatility.
Growth/Inflation Outlook: Real GDP grew 4.3% in 2010, up from 1.45% in 2009, driven by strengthening domestic demand. Investment grew a solid 11.0%yoy helped in part by investment in inventories (which added 1 percentage point to GDP growth). Private consumption grew 4.3% driven by the large 21.1% increase in the consumption of durable goods. Lastly, contrary to the experience of 2009, the external sector was a drag on growth as exports grew a weak 2.2%, and this was largely eclipsed by the 14.7% increase in imports. That is, in 2010 net trade subtracted 2.9 percentage points from real growth, while in 2009 it added 1.4 percentage points. Given the 4Q2010 growth surprise, the strength of a number of leading indicators, firming credit flows and a gradually improving labour market picture, we expect real GDP growth to accelerate to 5.5% in 2011, with the growth dynamics supported by increasingly buoyant domestic consumption and investment.
Monetary Policy Forecast: The next Central Bank meeting is on June 17. We expect the Central Bank to hike the policy rate by another 25bp to 4.25%. Our calculations suggest the rate normalization cycle does not need to be very aggressive (frontloaded or moving the policy rate beyond neutrality), given well-behaved core inflation dynamics, a still negative (albeit tightening) output gap, and the risk that an aggressive rate normalization cycle could rekindle strong COP appreciation pressures. As such, we expect the Central Bank to take the policy rate to around 4.50%-5.00% by end-2011.
Fiscal Policy Outlook: The central government fiscal deficit continues to hover at around 4% of GDP. The government has recently unveiled a plan to adopt a counter-cyclical fiscal rule that should deepen and consolidate the fiscal adjustment.
Balance of Payments Situation: The current account deficit widened to US$8.9bn in 2010 (3.1% of GDP) from US$5.1bn in 2009 (2.2% of GDP). FDI flows reached a solid US$6.8bn in 2010. Solid terms of trade and growing crude oil experts are likely to broadly offset the expected significant increase in imports. We expect the current account deficit to hover around 3% of GDP in 2011.
Things to Watch: The currency dynamics and the risk of stepped-up official intervention.
0
500
1000
1500
2000
2500
3000
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
$/COP
Spot
GSDEER
-6%
-4%
-2%
0%
2%
4%
6%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
% GDP4-qtr ma
Colombia: BBoP vs Current Account
CA BBoP
Alberto M. Ramos
23
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Mexican Peso FX Forecast: We are maintaining our 3-, 6- and 12-month forecasts for $/MXN at 11.55, 11.50 and 11.50, respectively. This implies €/MXN at 16.75, 17.25 and 17.83 in 3, 6 and 12 months. The current $/MXN GSDEER is 12.49 and €/MXN GSDEER is 14.79.
Motivation for Our FX View: Activity hit a soft patch late in 1Q2011 but we expect the cyclical recovery to firm during 2H2011 on the back of growing credit flows and an improving labour market. A solid Balance of Payments (particularly the capital account) and attractive carry offer fundamental support for the MXN. Banxico remains a non-activist central bank committed to a relatively free-floating FX regime.
Monetary Policy and FX Framework: The Central Bank targets inflation (3.0%±1.0%) by calibrating the TdF policy rate level under a managed-float FX regime. Banxico may intervene in the FX market to dampen volatility and/or avoid dislocations under thin market liquidity conditions. The Bank is currently auctioning US$600mn/month in Dollar put options, which can be exercised whenever the fixing is below the 20-day spot price moving average.
Growth/Inflation Outlook: The economy is experiencing a moderate cyclical recovery. We expect real GDP to expand a moderate 4.4% in 2011 on the back of firming demand conditions and still solid export performance. The output gap is on a path to close sometime during 2H2011 (perhaps later), with capacity constraints more visible in the tradable (exporting) sectors than in the non-tradable sectors (e.g., there is still significant slack in the labour market). Inflation has been well-behaved. We expect headline inflation to hover around the middle of the upper half of the inflation target band (3.0%-4.0%) throughout 2011 and 2012.
Monetary Policy Forecast: The policy rate has been unchanged at a stimulative 4.50% since July 2009. The Central Bank has maintained a neutral but vigilant monetary policy stance throughout 2011. We expect the first rate move to take place sometime during 1Q2012 and the Bank to deliver 100bp of rate hikes during 2012 (four rounds of 25bp). In addition, we see higher risk that the first hiking move takes place later than 1Q2012 rather than earlier.
Fiscal Policy Situation: The fiscal/public-debt picture is solid. The government is on schedule to reduce the nominal fiscal deficit to 0.5% of GDP in 2011 from 0.8% in 2010.
Balance of Payments Situation: The BoP surplus rose almost fourfold to US$22.7bn in 2010 (2.2% of GDP), thanks to large capital inflows, strong manufacturing export growth and a moderate current account deficit. Our constructive view on the MXN is underpinned by Mexico's strong external indicators: a mild 0.5% of GDP projected current account deficit in 2011, which is about a quarter of projected FDI inflows. We forecast that in 2011 the BoP surplus will widen to about US$30bn (2.5% of GDP), which would allow the Central Bank to continue to accumulate reserves
Things to Watch: The outlook for manufacturing production in the US and international oil prices. The Central Bank has been tolerant of MXN appreciation and openly averse to capital controls and measures to restrict the free flow of capital.
0
2
4
6
8
10
12
14
16
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
$/MXN
Spot
GSDEER
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
91 93 95 97 99 01 03 05 07 09 11
% GDP4-qtr ma Mexico: NBoP vs Current Account
CA NBoP
Alberto M Ramos
24
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Peruvian New Sol FX Forecasts: We revise our 3-, 6- and 12-month forecasts for $/PEN to 2.78, 2.80 and 2.82 from 2.76, 2.76 and 2.77. This implies €/PEN at 4.03, 4.20 and 4.37 in 3, 6 and 12 months respectively. The current $/PEN GSDEER is 3.02 and €/ PEN GSDEER is 3.58.
Motivation for Our FX View: The robust trade and balance of payment surpluses remain supportive of PEN strength. However, with the Central Bank making an early pause in the monetary policy tightening cycle, some of the pressure could recede. Moreover, we believe the $/PEN rate could drift weaker, because the incoming administration of President-elect Humala wants a more "competitive exchange rate". As a result, we see two possible scenarios: (a) if capital inflows remain strong, the Central Bank may step up the FX reserve accumulation in order to fight off appreciation pressures; (b) if, instead, uncertainty about the direction of policies is high, this would likely reduce net capital inflows and, all else equal, dampen pressure on the PEN.
Monetary Policy and FX Framework: The Central Bank pursues an inflation targeting regime: the target is a challenging 2%±1%. The Central Bank holds monthly monetary policy meetings and pursues a managed/floating FX regime.
Growth/Inflation Outlook: We have revised our real GDP growth forecast for 2011 down to 6.4% from 6.8%yoy in recognition of the deceleration in private investment growth expected for 2Q (from 15% to 6%yoy). The outlook for 2H is likely to remain uncertain until the incoming administration makes policy announcements. We expect inflation to increase to 3.54%yoy in 2011, which is above the upper end of the Central Bank's tight target band. For 2012, we see inflation gradually declining back towards the target.
Monetary Policy Forecast: The MPC left the policy rate unchanged at 4.25% in June. According to the Central Bank, the policy rate is already at neutral levels (taking into consideration reserve requirements). With this decision, the Bank is signalling that at this juncture there is no need to be ahead of the curve. That is, with supply-side inflationary pressures receding, economic activity moderating and inflation expectations for year-end 2012 well-anchored within the Central Bank's target band, there is no need to take the policy rate into above-neutral territory. As a result, we now think it is more likely that the Bank will remain on hold in July unless inflation re-accelerates.
Fiscal Policy Outlook: Fiscal execution remains prudent. The incoming administration has signalled it will respect the deficit limit set by the fiscal responsibility law (i.e., a maximum annual deficit of 1% of GDP).
Balance of Payments Situation: The current account posted a mild US$672mn deficit in 1Q2011. However, the capital account posted a US$1.7bn surplus. Notwithstanding stronger terms of trade and an expected slowdown in import growth, we expect the projected increase in outward remittances of profits and dividends to erode the current account balance to -1.8% of GDP in 2011 from -1.5% GDP in 2010. The current account deficit is likely to be more than fully financed by FDI inflows.
Things to Watch: Key cabinet nominations by President-elect Humala.
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
91 93 95 97 99 01 03 05 07 09 11
$/PEN
Spot
GSDEER
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
90 92 94 96 98 00 02 04 06 08 10
% GDP4-qtr ma Peru: Current Account
CA
Eduardo A Cavallo
25
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
FX Forecasts: We maintain our 3-, 6- and 12-month forecasts at a flat 4.3 VEF/USD. This implies €/VEF at 6.24, 6.45 and 6.67 in 3, 6 and 12 months respectively. The current $/VEF GSDEER is 3.40 and €/VEF GSDEER is 4.03. The preferential of the two FX cash-rates operated by the Currency Control Board (CADIVI) was devalued effective January 1 from 2.6 to 4.3 to the Dollar. The non-preferential rate remained at 4.3. With this, the authorities unified the two rates. We estimate that the 39.5% devaluation of the strongest of the three official rates was equivalent to a 13%-16% average devaluation.
Motivation for Our FX View: The Central Bank began operating a new FX market (SITME) in June 2010 to substitute for the closed parallel market (involving the sale of Dollar-denominated government bonds that can be sold abroad for USD). Through the SITME, the Bank sets an implicit VEF trading band (between 4.3 and 5.3 to the Dollar). We do not expect another devaluation of the CADIVI rate in 2011 but would not rule out an adjustment of the upper limit of the band to around 6.0. The government created a new Public Securities Market, which could in time turn into another outlet for Dollar-denominated bonds.
Monetary Policy and FX Framework: Monetary policy remains subordinated to fiscal priorities and the autonomy of the Central Bank has declined. The Bank sets a floor/ceiling on bank deposit/loan rates and directs about half of total credit in the economy.
Growth/Inflation Outlook: The Caracas CPI has printed above 1% per month for 46 consecutive months and the core measure averaged 33.5%yoy between January 2008 and May 2011. This attests to how ingrained inflation has become, increasing the growth-inflation sacrifice ratio (the required output loss to disinflate the economy). Real GDP grew 4.5%yoy during 1Q2011. Public spending and inventory accumulation supported activity in 1Q2011 and have brought the economy out of a two-year-long slump. We expect a moderate recovery in 2011, as the positive impulse of firmer terms-of-trade and fiscal activism is likely to be somewhat offset by high inflation, supply bottlenecks, and a business/investment environment that is limiting private investment. We expect the economy to grow a moderate 4.0% in 2011 on the back of firmer oil prices and a favourable statistical base.
Monetary Policy Forecast: Domestic financial conditions have been expansionary over the last few years (highly negative real rates), which undermines the effectiveness of the fixed exchange rate as the economy's nominal anchor.
Fiscal Policy Outlook: Fiscal execution remains opaque. A large amount of fiscal spending is taking place through the balance sheet of state-owned banks and PdVSA. The overall fiscal stance has been lax for many years.
Balance of Payments Situation: Higher oil prices are likely to lead to another sizeable surplus in 2011 (6.2% of GDP). Sizeable private-sector capital flight is likely to persist, given the country's deteriorating macro performance, legal/regulatory uncertainty and weak enforcement of the sanctity of contracts.
Things to Watch: The political dynamics ahead of the pivotal 2012 presidential elections and the evolution of Central Bank reserves.
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Asia Australian Dollar
FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for A$/US$ at 1.05, 1.06 and 1.06. This implies €/AUD at 1.38, 1.42 and 1.46 in 3, 6 and 12 months respectively. The current A$/US$ GSDEER is 0.84 and €/A$ GSDEER is 1.42.
Motivation for Our FX View: The AUD continues to be supported by some non-fundamental drivers (e.g., positioning and central bank reserve diversification), which coincided with further Dollar weakness. The main catalyst for ongoing AUD/USD strength is our forecast for a weaker US$ forecast. However, given our view that Australian economic growth has some downward risk relative to official forecasts, Australian commodity prices are more likely to fall than rise going forward and the trade accounts should peak around mid-year, we expect AUD weakness via the EUR and GBP rather than the weaker USD.
Monetary Policy and FX Framework: Inflation targeting: The RBA aims to keep CPI inflation between 2% and 3% on average over the cycle. Operationally, this is implemented by attempting to keep underlying inflation within this target band, but it allows sufficient flexibility for policy to take account of short-run developments in employment and economic growth. The FX regime is free-float, although the RBA intervenes if market moves are disorderly.
Growth/Inflation Outlook: Although the outlook for Australian economic growth remains positive, we expect the impact of earlier flooding to constrain growth to around 2.0% in 2011. We expect growth to accelerate to 4.0% in 2012. Underlying inflation is forecast to test the top of the RBA's target band through 2012.
Monetary Policy Forecast: With financial conditions already restrictive, fiscal policy now confirmed to be sharply contractionary, the global environment still uncertain and near-term growth outcomes likely to fall short of the RBA's forecasts, we do not expect further tightening to be warranted until November 2011 (+25bp). Consensus remains for an earlier increase. Beyond November, we expect a further increase in March 2012 to signal the end of the tightening cycle.
Fiscal Policy Outlook: Australia's fiscal position is benign relative to comparable economies. The Australian Federal Government is determined to promptly consolidate the public finances and return the Budget to surplus by 2012-13, seeing net debt to GDP peak at just 7.2% of GDP.
Balance of Payments Situation: A surge in the terms of trade to a new all-time high has pushed Australia towards its largest trade surplus (as a share of GDP) in 37 years. Stronger export prices should support the surplus through 1H2011 despite weaker coal shipments, before the trade balance comes under pressure from an easing in commodity prices, higher oil import costs, and rising capital imports to meet the needs of the business investment boom.
Things to Watch: Australian house prices have shown some modest declines recently, renewing correction fears. However, it is global risks such as the potential for renewed European banking concerns and Chinese policy tightening that could prompt a shift in A$ sentiment.
Economist: Tim Toohey [email protected] Copyright 2011 Goldman Sachs & Partners Australia Pty Ltd. (ABN 21 006 797 897). All rights reserved.
Tim Toohey
27
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Chinese Yuan
3.4
4.4
5.4
6.4
7.4
8.4
9.4
90 92 94 96 98 00 02 04 06 08 10
$/CNY
Spot
GSDEER
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
% of GDP China: BBoP vs Current Account
CA BBoP
Source: Haver Analytics
BBoP = Current Account + Net FDI + Net Portfolio Investment
FX Forecasts: We are maintaining our 3-, 6- and 12-month USD/CNY forecasts at 6.40, 6.31 and 6.12 on 3-, 6- and 12-month horizons. EUR/CNY: 9.28, 9.47 and 9.49 in 3, 6 and 12 months. GSDEER of USD/CNY: 7.24.
Motivation for Our FX View: We continue to expect the Chinese government to allow the CNY to appreciate against the Dollar at a pace of 6% per annum this year. With the external demand recovery becoming more clear in developed economies this year, we think Chinese policymakers' 'risk-based' approach on CNY exchange rate adjustments will likely allow the average pace of appreciation in 2005 - 2008 to take place.
Monetary Policy and FX Framework: The People's Bank of China (PBoC) is not independent from the central government and has multiple targets of maintaining price stability and high growth. It does not hold regular policy meetings and policy changes are typically released after the close of the local market without advanced notice. The Monetary Policy Committee of the PBoC is an advisory body, which does not determine policy direction. The FX regime has been a managed float in July 2005 - August 2008 and again in June 2010.
Growth/Inflation Outlook: We expect May industrial production growth to rebound both in yoy and sequential terms as suggested by the official and HSBC PMI. In the meantime, January-May FAI yoy growth is likely to soften, while May retail sales are likely to rise in yoy terms. On the inflation front, May CPI inflation is likely to pick up as a result of the continued rise in meat prices and the drought in Southern China, which pushed up vegetable and seafood prices.
Monetary Policy Forecast: We expect loan control to remain tight, with increased monitoring of off-balance-sheet business developments. We think that the RRR is increasingly being used as a regular liquidity management tool, to a large extent in replacement of central bank bill issuance. In addition, we continue to expect repeated RRR hikes as has been the case over the past half year. In the meantime, we think the rate hike cycle is close to its end and we continue to expect one more interest rate hike of 25bp in the rest of 2011.
Fiscal Policy Outlook: Fiscal policy was tightened as revenue growth consistently outpaced fiscal expenditure growth, and a number of fiscal subsidies such as subsidies to automobile purchases have been cancelled. If the CPI inflation reading creates some breathing space in 3Q2011, we expect the government to approve more investment in electricity generation, in addition to the social housing construction on their priority list.
Balance of Payments Situation: The much smaller trade surpluses we saw in 2010 highlight that the economy is more balanced than it was. The continued strengthening in China's domestic demand that we are forecasting should help further alleviate the trade imbalance between China and the world.
Things to Watch: The risks from inflation.
Helen Qiao, Yu Song, and Yin Zhang
28
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Hong Kong Dollar FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/HKD at 7.80, 7.80 and 7.80. This implies €/HKD at 11.31, 11.70 and 12.09 in 3, 6 and 12 months respectively. The current $/HKD GSDEER is 6.2.
Motivation for Our FX View: In our view, the political incentive to abandon (or modify) the HKD peg system is still low, especially given that the uncertainties of the near-term global growth outlook may hold the authorities back from making changes to the current HKD peg system.
Monetary Policy and FX Framework: The HKMA pursues just one goal: maintaining the USD/HKD peg. The HKD exchange rate follows a currency board regime, with a fixed USD/HKD 'Convertibility Zone' of 7.75-7.85.
Growth/Inflation Outlook: 1Q2011 GDP expanded by 7.2%yoy. Sequentially, GDP growth accelerated to 11.7%qoq; ann., after 6.1% in 4Q2010. This was driven by robust exports and consumption expenditure. We maintain our GDP growth forecast of 5.2% for 2011, but have revised down our 2012 GDP growth forecast to 5.2% (from 5.6% previously) on lower global growth and higher commodity prices. Our core view remains that the accommodative financial conditions, continuous improvement in the labour market and steady growth from China should continue to support growth. Furthermore, we continue to expect the strong growth fundamentals to underpin the ongoing healthy asset reflation cycle.
Monetary Policy Forecast: We believe the HKD-USD peg will likely remain for some time, given the lack of a better alternative monetary policy regime for now. We believe the costs of transitioning to a new regime will likely outweigh the benefits as well. In the meantime, before the eventuality of moving to a HKD-CNY peg, we believe Hong Kong will have little choice but to continue to import loose financial conditions from the US, with its interest rates still linked with the USD interest rate cycle, as long as the US Fed maintains its accommodative monetary policy stance.
Fiscal Policy Outlook: For FY2010/2011, the government budgeted a consolidated budget surplus of HK$71.3bn, or 4.1% of GDP. For FY2011/2012, the budget surplus is at HK$3.9bn or 0.2% of GDP. In our view, the overall fiscal stance is net expansionary, with targeted support for households to cope with rising inflationary pressures.
Balance of Payments Situation: We expect the current account surplus to be to 7.3% of GDP in 2011, versus 6.6% of GDP in 2010. Given the fixed exchange rate system in Hong Kong, the BBoP has not been a determining factor for its monetary policy system, or for the HKD exchange rate specifically. As Hong Kong is an entrepot trade centre for the mainland and an offshore hub for investment in China, the relevance of the BBoP position to the currency relates primarily to portfolio capital flows.
Things to Watch: We would continue to watch for the further developments in soft and hard infrastructures to enhance the integration with the mainland economy, including the expansion of CNY businesses. These include a pilot scheme to allow FDI going into China to use the RMB for settlement, which may be implemented in 2H2011.
4.30
5.30
6.30
7.30
8.30
9.30
10.30
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
$/HKD
Spot
GSDEER
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
00 01 02 03 04 05 06 07 08 09 10 11
% GDP4-qtr ma Hong Kong: BBoP vs Current Account
CA BBoP
Enoch Fung
29
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Indian Rupee FX Forecasts: We are keeping our 3-, 6- and 12-month USD/INR targets at 46, 46.2 and 47 respectively. This implies EUR/INR at: 66.7, 69.3 and 72.85 in 3, 6 and 12 months. Current GSDEER for $/INR: 65.96.
Motivation for Our FX View: Although we are forecasting a weaker USD, our forecasts for USD/INR are unchanged due to the prospect of capital outflows from equity markets due to macro headwinds and a rising oil import bill. The risk to our view is that rising interest rates attract capital searching for high yield.
Monetary Policy and FX Framework: In the new operating procedure for monetary policy announced at the May 3 meeting, the RBI targets the interest rate corridor, with the repo rate in the middle, the reverse repo rate 100 below it as floor and the new Marginal Standing Facility rate 100bp above it as ceiling, in order to fulfil the twin objectives of maintaining price stability and providing adequate liquidity to meet the genuine credit needs of the economy. It also manages the exchange rate to avoid excess volatility.
Growth/Inflation Outlook: January-March real GDP growth came in at 7.8%yoy. There was a meaningful decline in industry growth along with a moderation in services. For FY2011 as a whole, GDP grew 8.5%yoy, higher than the 8.0%yoy rise in FY2010.The April IP came in at 6.3%, compared with 8.8%yoy in March. The latest IP numbers suggest that not only investment demand, but also consumption demand is slowing. We revised our GDP growth forecast for FY2012 to 7.5% from 7.8% due to the impact of higher rates, and a weaker capex cycle. Our revised GDP forecast for FY2013 is 7.8%. April WPI inflation came in at 8.7%yoy, lower than 9.1%yoy for March. High oil and core prices are driving inflation. We increased our inflation forecast for FY2012 to 8.1% from 7.5%, driven entirely by the oil increase, and to 5.1% for FY2013, due to a much higher base and weaker demand.
Monetary Policy Forecast: The RBI hiked the repo rate by 50bp and the reverse repo rate by 50bp at the May 3 meeting, in line with our expectations, but ahead of consensus expectations. We expect the RBI to hike policy rates by 25bp at the June 16 meeting. However, the weaker- than-expected output data may induce the RBI to reduce the quantum of rate hikes in the remainder of 2011.
Fiscal Policy Outlook: We revised our forecast for the central government's deficit to 5.4% of GDP from 5.2% of GDP in FY2012, which is higher than the budget estimate of 4.6% of GDP.
Balance of Payments Situation: India's current account deficit declined to 2.1% of GDP in the October-December quarter from a historical high of 4.2% of GDP in the July-September quarter. The April-December 2011 current account deficit is tracking at 3.1% of GDP. We revised our forecast for the current account deficit down to 3.4% of GDP from 4.3% due to stronger exports and weaker domestic demand.
Things to Watch: Core inflation, the RBI policy meeting, liquidity conditions, the monsoon.
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Indonesian Rupiah
0
2000
4000
6000
8000
10000
12000
14000
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
US$/Indonesian Rupiah
Spot
GSDEER
FX Forecasts: We maintain our 3-, 6- and 12-month forecasts for $/IDR at 8,500, 8,450 and 8,350. This implies €/ IDR at 12,325, 12,675 and 12,943. The current $/IDR GSDEER is 10,166.
Motivation for Our FX View: Our core view remains that the recovery has been robust, as evidenced in GDP growth as well as in the balance of payments position. Moreover, the monetary authorities have also delivered a credible response throughout the latest global slowdown and management of inflation expectations. We believe the underlying strength in growth fundamentals will remain a positive catalyst for the IDR, as the Central Bank will likely view the stronger IDR as helpful in anchoring inflation expectations.
Monetary Policy and FX Framework: Bank Indonesia operates on an Inflation Targeting Framework, which aims to improve effectiveness and governance in monetary policy, in order to achieve the ultimate goal of price stability in support of sustainable economic growth and public prosperity. The IDR operates as a managed float with the aim of preventing excessive exchange rate volatility.
Growth/Inflation Outlook: Headline inflation has continued to trend lower at a gradual pace. May headline CPI inflation rose by 6.0%yoy, versus 6.2%yoy in April and in line with market expectations of 5.9%yoy. Core inflation stayed stable, and food inflation continues to soften. Food inflation eased again to 11%yoy, compared with 12.14%yoy in the previous month. We now expect quarterly inflation to average 6.3% in 2Q2011 and 6.1% for 2H2011. Our annual average CPI inflation forecast for 2011 is 6.3%yoy.
Monetary Policy Forecast: The BI kept the policy rate unchanged at 6.75% at its monetary policy meeting on May 12. While headline inflation has surprised on the downside for in the past three months, the Bank still expects elevated inflationary pressures due to high commodity prices and strong domestic demand. In particular, the BI also highlighted the risk of an upward trend in core inflation. We expect core inflation to continue to trend higher and reach 5.8%yoy by the end of 2011, from 4.6%yoy in April. We expect the Bank to hike the policy rate by another 50bp for the remainder of the year, taking the policy rate to 7.25%. We then expect another 75bp of hikes in 2012, taking the policy rate to 8.00%. In addition, an appreciating IDR is also regarded by the BI as part of its monetary policy to tame inflation.
Fiscal Policy Outlook: The government is expected to continue its fiscal stimulus amounting to 1.6% of GDP. We believe the budget deficit could be lower than our initial projection of around 2% of GDP for 2010, slightly higher than the government's projection of 1.6%, given potentially better than expected revenue collection.
Balance of Payments Situation: Indonesia's balance of payments was strong in 1Q2011, registering a surplus of US$7.7bn. The broad balance of payments posted a surplus of US$8.4bn (4.3% GDP). We expect the current account surplus to be lower at 0.3% GDP in 2011.
Things to Watch: The Central Bank's measure on managing domestic credit and liquidity.
-6%
-4%
-2%
0%
2%
4%
6%
98 99 00 01 02 03 04 05 06 07 08 09 10 11
% GDP4-qtr ma
Indonesia: BBoP vs Current Account
CA BBoP
Enoch Fung
31
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Korean Won
FX Forecasts: We have revised our 3-, 6- and 12-month forecasts for USD/KRW to 1,060, 1,050 and 1,040 from 1,050, 1,030 and 1,030. This implies EUR/KRW at 1,537, 1,575 and 1,612 in 3, 6 and 12 months. The current USD/KRW GSDEER is 1,359.
Motivation for Our FX View: We continue to expect the KRW to strengthen, supported by the trade surplus, interest rate hikes, growth momentum and a policy focus on price stability. Macro-prudential measures introduced in late 2010 and early 2011 are unlikely to change the direction of USDKRW moves.
Monetary Policy and FX Framework: Korea has a formal inflation-targeting regime that targets annual headline inflation of 2%-4% over 2010-2012. The exchange rate policy is traditionally undertaken by the government. The exchange rate regime has changed from free floating to a floating regime, according to the IMF, as a result of smoothing interventions from the government amid ample global liquidity.
Growth/Inflation Outlook: We expect real GDP to grow 4.3% in 2011, above consensus expectations, on the prospects of a sustained recovery in developed markets and resilient growth in emerging markets. Exports will likely be strong on the back of recovering US consumption. We envisage strong private consumption due to improving household balance sheets and robust wage growth. Our 2012 growth forecast is 4.4%. We recently raised our inflation forecast further to 4.2% for 2011 and 3.7% for 2012, driven by high food and energy prices and slower-than-expected KRW appreciation.
Monetary Policy Forecast: The Bank of Korea raised the policy rate 50bp to 3% in 1Q2011, with a surprise 25bp hike on June 10, in line with our expectations. We expect a further withdrawal of monetary accommodation for the rest of 2011, with a total of 125bp in hikes in 2011. Our baseline forecast is two more 25bp hikes in 2H2011, with the next 25bp hike in August or September, given the need to lower inflation expectations before demand pressure intensifies. The KRW appreciation, together with further rate hikes and the government's supply measures, could help reduce inflation and inflation expectations arising from negative supply shocks and emerging demand pressure in 2H2011. We estimate that, at the current level of USDKRW of around 1,080, inflation could exceed the maximum range of 4% in 2011.
Fiscal Policy Outlook: The fiscal policy has already tightened substantially this year. The 2011 budget envisages a further, moderate 0.6%-of-GDP decline in the budget deficit.
Balance of Payments Situation: We expect the current account surplus to decline almost by half in 2011 relative to 2010, owing to a recovery in commodity prices, a strong economic rebound and KRW appreciation. The current account will still likely record a surplus of around 1%-1.5% of GDP in 2011 which, given expected capital inflows, should strengthen the KRW.
Things to Watch: Government intervention and oil prices will likely continue to play an important role for the USDKRW. Financial flows of equities, bonds and loans, affected by US rate policies and global risk sentiment, will likely be a swing factor in the short term.
600
800
1000
1200
1400
1600
1800
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
US$/Korean Won
Spot
GSDEER
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
91 93 95 97 99 01 03 05 07 09 11
% GDP4-qtr ma
Korea: BBoP vs Current Account
CA BBoP
Goohoon Kwon
32
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Malaysian Ringgit
FX Forecasts: Our 3-, 6- and 12-month forecasts for $ /MYR remain at 2.98, 2.90 and 2.85. This implies EUR/MYR at 4.32, 4.35 and 4.42 in 3, 6 and 12 months respectively. The current $/MYR GSDEER is 2.65.
Motivation for Our FX View: Cyclically, we believe a stronger exchange rate makes a lot of sense given the need for tighter financial conditions amid the robust recovery and higher inflationary pressures. This suggests that the Central Bank could acquiesce to fundamental appreciation pressures on the currency, given the healthy broad balance of payments (BBoP) surplus and the terms of trade boost from higher commodity prices. Structurally, a stronger exchange rate is also appropriate for what the government is hoping will be an extended period of increased capital expenditure, given the long-term economic objectives laid out in its Economic Transformation Program.
Monetary Policy and FX Framework: Monetary policy is set by the Board of Directors of Bank Negara Malaysia (BNM). The policy instrument is the Overnight Policy Rate, which is 3.0% currently. The Ringgit has operated in a managed float framework since its USD peg was lifted in July 2005.
Growth/Inflation Outlook: The official 5%-6% target for growth should be easily attainable for this year. The main drivers of growth continue to be robust domestic demand benefiting from the relatively accommodative monetary policy settings thus far, as well as the trickle-down of wealth effects from higher commodity prices than previously expected. Our real GDP growth forecast for this year is 5.4%. The output gap is expected to turn slightly positive in 2H2011 and move further into positive territory in 2012, underpinning inflationary pressures in a context of elevated global commodity prices. Our CPI inflation forecast for the year is 3.7%, above the upper end of the Central Bank's 2.5%-3.5% forecast range for the year.
Monetary Policy Forecast: Bank Negara Malaysia restarted its rate hiking cycle at the meeting in May, with the first hike of this year, after raising rates by a total of 75bp last year. We continue to expect another 50bp in hikes this year, taking the Overnight Policy Rate to 3.50%.
Fiscal Policy Outlook: The fiscal deficit is projected to fall slightly to 5.4% of GDP in 2011 from 5.6% in 2010. More needs to be delivered on fiscal consolidation if the government is to achieve its targets of lowering the deficit to the 3% level by 2015.
Balance of Payments Situation: The current account surplus widened to MYR30bn in 1Q2011 from MYR23bn previously on the back of higher commodity shipments, while portfolio investments also rose further. The broad balance of payments should continue to remain in healthy surplus boosted by commodity exports (now around 15% of GDP on a rolling basis).
Things to Watch: The possibility of early general elections this year. Progress on the government and economic transformation programs. Progress on continued foreign exchange liberalization and subsidy (especially fuel) reforms.
2.0
2.5
3.0
3.5
4.0
4.5
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
US$/Malaysian Ringgit
Spot
GSDEER
-5%
0%
5%
10%
15%
20%
25%
30%
00 01 02 03 04 05 06 07 08 09 10 11
% GDP4-qtr ma
Malaysia: BBoP vs Current Account
CA BBoP
Mark Tan
33
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
New Zealand Dollar
FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for NZD/$ at 0.78, 0.79 and 0.80. This implies €/NZD at 1.86, 1.90 and 1.94 in 3, 6 and 12 months respectively. The current NZD/$ GSDEER is 0.63 and €/NZD GSDEER is 1.89.
Motivation for Our FX View: While markets have pushed through our near-term forecasts, we are maintaining our current expectations for the NZ$. Record prices for NZ's key exports, improving domestic economic momentum and a recent shift in rhetoric from the RBNZ to a less dovish stance are all supportive of a stronger NZ$. However, we are cognisant of the recent weakening in global economic momentum and the fact that the lift in the NZ$ has already delivered a tightening in financial conditions. We maintain a generally positive view towards the NZ$ overall given structural headwinds for the US Dollar. However, we believe there is a possibility of a near-term correction.
Monetary Policy and FX Framework: The Reserve Bank of New Zealand is a flexible inflation targeter. The RBNZ Governor is sole decision maker on the Official Cash Rate (OCR), and contracted to achieve "future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term." The FX regime is a free float.
Growth/Inflation Outlook: NZ's economic recovery to date has been lacklustre, with private-sector deleveraging dominating. A second major earthquake in February further delayed the recovery. However, we are now detecting early signs of improving economic momentum. A solid growth impetus will also be provided once reconstruction begins, although this is not likely until 2012 (with aftershocks delaying any rebuild). A recent GST increase will see headline inflation breach 5%yoy. At present, underlying inflation remains contained. However, pending supply constraints from rebuilding work in addition to food and petrol price rises make the inflation backdrop less benign than otherwise would have been the case.
Monetary Policy Forecast: The RBNZ delivered an "emergency" 50bp cut in the OCR to 2.50% in response to the earthquake. At this stage we believe the process of policy nominalisation will resume in 1Q2012, with contained underlying inflation, a high NZ$ and a steep yield curve allowing the RBNZ to be patient. However, the risks are skewed towards an earlier move, with the RBNZ showing some concern over the inflation backdrop.
Fiscal Policy Outlook: The starting point for NZ's fiscal position is better than in many developed nations. However, the social and economic cost of the earthquake, as well as a weak cyclical recovery, have resulted in a sharp deterioration. Nevertheless, the NZ Government appears strongly committed to a credible path of fiscal consolidation.
Balance of Payments Situation: The annual current account balance sits at 2.1% of GDP. Large earthquake related reinsurance flows will likely result in an uncharacteristic surplus over 1H2011. Beyond this, we believe the current account deficit will settle at around 5% of GDP.
Things to Watch: While the global backdrop remains a risk, a key issue is the timing of interest rate hikes. This will be data-dependent, with inflation gauges (and inflation expectation measures) important to watch.
Economist: Philip Borkin [email protected] Copyright 2011 Goldman Sachs & Partners New Zealand Ltd. All rights reserved.
34
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/PHP at 41.3, 40.8 and 40.3. This implies €/PHP at 59.9, 61.2 and 62.5 in 3, 6 and 12 months respectively. The current $/PHP GSDEER is 54.74.
Motivation for Our FX View: Several factors are likely to support Peso strength over 12 months. The recovery process is firmly underway, supported by two engines of flows: stable remittances and growing IT service exports. In addition to the above, a stronger current account surplus partly due to strong remittances is also likely to be supportive of the PHP. A brighter view on the US outlook would also give policymakers more comfort in allowing currency appreciation.
Monetary Policy and FX Framework: The Bangko Sentral ng Pilipinas (BSP) has an inflation targeting framework (3%-5% in 2011 and 2012) and aims to promote price stability to facilitate balanced and sustainable growth. The BSP uses the overnight reverse repo rate (lending rate) and repo rate (borrowing rate) as its key policy instruments. The PHP operates in a freely-floating exchange rate environment, where the BSP intervenes to manage excess volatility through open-market operations.
Growth/Inflation Outlook: We continue to expect GDP growth to be supported by the two engines of flows: stable remittances and growing IT service exports. On inflation, May headline CPI inflation picked up to 4.5%yoy from 4.3%yoy in April. We expect price pressures to persist on the back of above-trend growth in 2011 and 2012. Moreover, the recent surge in food and oil prices would likely emerge as another major driver of inflation in 2011. We expect headline CPI inflation to peak at 5.6% by 2Q2011, bringing annual average inflation to 5%. For 2012, we forecast that headline inflation will average 5.0%yoy. Meanwhile, we estimate that core inflation will continue to accelerate over the next two years.
Monetary Policy Forecast: The BSP raised both the policy repo and reverse repo rates by 25bp to 6.50% and 4.50% respectively in May. The Central Bank's stance remains notably hawkish, as it noted that it now sees "3-5 percent inflation target for 2011 remains at risk, mainly as a result of expected pressures from oil prices". We expect the Central Bank to continue with rate hikes, and forecast another 50bp in hikes in the rest of this year. We believe that rising inflationary pressures, especially from domestic sources, continue to warrant more tightening through policy rate hikes and currency appreciation.
Fiscal Policy Outlook: The overall fiscal stance of President Aquino's first budget would likely be net contractionary, after two years of expansionary stance in 2008 and 2009. We expect the 2011 budget deficit to be further reduced to 3.1% of GDP, compared with the government's target of 3.2%.
Balance of Payments Situation: Strong remittances and a growing service export sector are likely to support the current account. We expect the current account surplus to come in at 4.4% in 2011.
Things to Watch: The new President's commitment to lower the fiscal deficit and the pace of remittances.
Philippine Peso
5
15
25
35
45
55
65
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
US$/Philippine Peso
Spot
GSDEER
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
00 01 02 03 04 05 06 07 08 09 10 11
% GDP4-qtr ma
Philippines: BBoP vs Current Account
CA BBoP
Shirla Sum
35
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Singapore Dollar FX Forecasts: We are maintaining our $/SGD forecasts at 1.23, 1.21 and 1.18 in 3, 6 and 12 months. This implies €/SGD at 1.78, 1.82 and 1.83 in 3, 6 and 12 months respectively. The current $/SGD GSDEER is 1.13
Motivation for Our FX View: The MAS re-centred the SGD NEER bands upwards at its April meeting on the back of robust growth and higher inflationary pressures. We continue to expect SGD appreciation over the medium term as the MAS keeps the SGD NEER on its current appreciation path.
Monetary Policy and FX Framework: The MAS conducts monetary policy by targeting an undisclosed appreciation path of the SGD NEER within a policy band, with the goal of maintaining stable inflation and growth. The MAS last re-centred the SGD NEER bands upwards, fixing the new midpoint slightly below the prevailing rate, with no change to the slope or width of the bands.
Growth/Inflation Outlook: We believe Singapore will transition to a more sustainable pace of growth (around trend of 5%) over the next few years. We expect the domestic demand recovery to remain robust and forecast GDP growth of 5.5% in 2011 and 5.4% in 2012. On the inflation front, the risks are tilted towards higher inflation given the high level of resource utilisation, while the pressures from global food and commodity prices remain elevated. We forecast headline CPI inflation to average 4.2% in 2011, and 3.3% in 2012.
Monetary Policy Forecast: The MAS announced at its last meeting in April that it would re-centre the SGD NEER bands upwards, with its midpoint fixed below the prevailing level of the SGD NEER. The slightly more calibrated nature of re-centring was probably due to the consideration of the cumulative tightening moves over the past 18 months, as well as to allow for the lags in monetary policy to occur. Given the calibrated nature of the most recent tightening move, we think the bar to further tightening moves has likely been raised.
Fiscal Policy Outlook: For FY2010/2011, the government has budgeted a basic balance deficit of S$2.5bn (0.8% of GDP). Going into FY2011/2012, the government expects a smaller basic balance budget deficit of S$2.2bn (0.7% of GDP). Overall, fiscal policy has been counter-cyclical and we estimate that the fiscal impulse for 2011 will be slightly contractionary, building on from its contractionary impulse in 2010.
Balance of Payments Situation: The current account surplus is expected to remain in a healthy surplus of around 20% of GDP.
Things to Watch: We think that the monthly CPI inflation prints will be the key domestic datapoints to monitor going forward. Longer-term issues include Asean integration and the government's continued efforts in raising longer-term productivity. We are also monitoring any shifts in policy given the government's move towards introspection following the results of the recent general elections.
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
US$/Singapore Dollar
Spot
GSDEER
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
90 92 94 96 98 00 02 04 06 08 10
% GDP4-qtr ma Singapore: BBoP vs Current Account
CA BBoP
Mark Tan
36
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Taiwan Dollar FX Forecasts: We maintain our 3-, 6- and 12-month forecasts for $/TWD at 28.0, 27.8 and 27.5. This implies €/TWD forecasts at 40.6, 41.7 and 42.6 in 3, 6 and 12 months respectively. The current $/ TWD GSDEER is 25.8.
Motivation for Our FX View: We maintain our view that the solid export recovery in Taiwan and strong balance of payments position should remain supportive for the TWD in the medium term, which in turn could help mitigate any imported inflationary pressure should global commodity prices begin to rise again further down the road.
Monetary Policy and FX Framework: The CBC manages inflation and growth expectations simultaneously; it adopts an intermediate monetary policy target for M2 growth (between 2%yoy and 6%yoy). The IMF defines the TWD exchange rate regime as a managed float, and we believe the weightings for the KRW, JPY and CNY are the highest in the trade-weighted basket of currencies that it monitors.
Growth/Inflation Outlook: We have recently revised down our Taiwan GDP growth forecast to 4.9%yoy from 5.2%yoy for 2012, on the back of lower US and China growth outlook and higher commodity prices forecasts. For 2011, given an upward revision in 1H2011 netting out this downward revision in 2H2011, the annual headline is round about the same at 4.7% for 2011. We maintain our core view that the domestic demand buffer should remain firm this year, driven by: 1) the ongoing improvements in labour demand and wages; 2) a potential capex expansion of tourism schemes to allow more mainland Chinese tourists to visit Taiwan; and 3) more favourable government social measures to support household consumption in the run-up to the next presidential election in early 2012.
Monetary Policy Forecast: We continue to forecast another two 12.5bp hikes at the June and September policy meetings, and another 25bp hike at the December policy meeting. This would amount to 62.5bp of total hikes in 2011. We then expect another 62.5bp of total hikes in 2012, taking the policy rate to 2.875% by end-2012. The rate hikes so far reflect an attempt by the Central Bank to bring market rates to a 'normal' level given the steady growth outlook and benign inflationary pressures.
Fiscal Policy Outlook: The consolidated budget deficit totalled NTD$431.6bn (3.2% of GDP) in 2010, lower than the NTD$432.7bn deficit in 2009. We expect the budget deficit to continue to decrease, to 2% of GDP in 2011 and 1% of GDP in 2012 due to the government's fiscal consolidation efforts.
Balance of Payments Situation: The broad balance of payments (BBoP) turned positive in 4Q2010, registering a surplus of US$6.9bn. This compares with the deficit of US$3.8bn in 3Q2010. The improvement in the BBoP in 4Q2010 was in part due to a reduced amount of net portfolio investment outflows. The current account surplus also widened to 8.8% of GDP on the back of strong exports.
Things to Watch: We would pay attention to forthcoming political and cross-straits policy developments, especially the potential introduction of the Individual Visitors' Scheme between China and Taiwan.
24
26
28
30
32
34
36
90 92 94 96 98 00 02 04 06 08 10
US$/Taiwan Dollar
Spot
GSDEER
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
90 92 94 96 98 00 02 04 06 08 10
% GDP4-qtr ma
Taiwan: BBoP vs Current Account
CA BBoP
Enoch Fung
37
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Thai Baht FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/THB at 29.75, 29.5 and 29.3. This implies € /THB at 43.1, 44.25 and 45.4 in 3, 6 and 12 months respectively. The current $/THB GSDEER is 35.0.
Motivation for Our FX View: One of the main underlying drivers of the currency should still be the broad Dollar move (which we expect to remain that of continued USD weakness) and as such our THB forecasts continue to reflect modest spot appreciation. However, due to the deteriorating growth/inflation mix and the potential volatility surrounding political developments, it is possible that we will see the overall THB move lag that of the region. As such, our THB forecasts implies a slight trade-weighted depreciation over the next 12 months.
Monetary Policy and FX Framework: The Bank of Thailand (BoT) sets the direction of monetary policy with price stability as the overriding objective, and also refines the inflation targeting framework (core CPI at 0.5% to 3.0%) to suit the Thai economy. The Baht operates on a managed float regime, in which the BoT intervenes to prevent excess volatility.
Growth/Inflation Outlook: We think Thailand is facing a deteriorating growth/inflation mix. Growth will be weighed on by Japanese supply chain disruptions to the auto sector, higher oil prices and less accommodative policy. Our GDP forecast is 3.8% for 2011, below consensus at 4.2%. Meanwhile, we also foresee rising inflationary pressures: our CPI forecast for 2011 is 4.1%, above consensus at 3.7%.
Monetary Policy Forecast: The BoT continued with its rate hiking cycle at the June meeting. We maintain our expectation that the BoT will continue with its policy normalisation process. We expect the BoT to hike rates by another 50bp this year and an additional 50bp next year to bring the policy rate to 4% by 1H2012.
Fiscal Policy Outlook: The FY2010 fiscal budget came in at a narrower than expected 2.9% of GDP (in part due to higher than forecast revenues) and is expected to widen further (to around 3-4% in FY2011) on the back of continued disbursement of stimulus funds as well as general election related expenditure boosts. However, in FY2012 and beyond (the fiscal year runs from October), we expect to see a move towards a gradually declining fiscal deficit as the authorities move towards fiscal consolidation in order to achieve their aim of a primary surplus by FY2016.
Balance of Payments Situation: The current account balance should remain in positive territory for the year although we could see the overall Broad Balance of Payment flows moderate with softening exports momentum and a higher import bill driven by higher oil prices.
Things to Watch: We would monitor potential political developments surrounding the forthcoming general elections set for July 3, and the impact of the Japanese supply chain disruptions, especially on the auto sector.
20
25
30
35
40
45
50
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
US$/Thai Baht
Spot
GSDEER
-15%
-10%
-5%
0%
5%
10%
15%
20%
94 96 98 00 02 04 06 08 10
% GDP4-qtr ma
Thailand: BBoP vs Current Account
CA BBoP
Mark Tan
38
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
Close 13 June 11, mid-rates for major markets. We are currently using September 2011, December 2011 and June 2012 contracts for 3-month forw ard rates.
10Y 3.1 3.2 3.8 3.2 4.0 3.3 4.3Argentina 3M 9.5 na 9.6 na 9.8 na 9.5Brazil 3M 12.3 na 12.8 na 13.3 na 13.3Chile 3M 5.3 na 4.5 na 4.5 na 5.5Mexico 3M 4.5 na 4.5 na 5.0 na 5.5
South Africa 3M 5.6 5.7 5.5 6.0 6.0 6.6 6.75Y 7.4 8.1 7.7 8.2 8.0 8.4 8.2
Interest Rate Forecasts
39
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
GS Sentiment Index
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
-10
-8
-6
-4
-2
0
2
4
6
8
10
01 02 03 04 05 06 07 08 09 10 11
EUR/US$Index EUR/US$ Vs GS Sentiment Index
Sentiment Index (lhs)
EUR/US$ (rhs)
70
80
90
100
110
120
130
140
-10
-8
-6
-4
-2
0
2
4
6
8
10
01 02 03 04 05 06 07 08 09 10 11
US$/YENIndex US$/YEN Vs GS Sentiment Index
Sentiment Index (lhs)
US$/YEN (rhs)
The possible range is +/-10. A value of +10 suggests bullish sentiment for the first currency of the pair (i.e., bullish EUR in EUR/$ and bullish $ in $/Yen). We would generally regard the index as a reverse indicator, i.e., high numbers are indicative of excessive positive sentiment and vice versa.
Current Last Week Current Last Week Current Last Week Current Last Week
EUR/$ -6.9 -6.9 8.5 8.7 7.5 9.9 3.0 3.9
$/Yen -0.8 -0.8 -8.4 -8.4 0.2 9.4 -3.0 0.0
IMM PositioningBull/Bear CommentsRisk Reversals Average
40
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
FX Currents
The Carry FX Current (Bloomberg: GSCUEMCC Index) is built to capture the performance of carry-based trading strategies in FX. In the long run, the return on holding high carry currencies tends to outperform low carry currencies. However, at times of high risk aversion, carry trades tend to post heavy losses. After a large decline in late 2008 (together with other risk assets), the Carry Current has strengthened by 10.2% since the beginning of 2009 and 64bp since the beginning of 2011.
Methodology: Our FX Currents, formerly ‘FX Slices’, are portfolios of currencies adjusted for carry and are designed to capture and identify themes that the market is trading. For some, the composition is adjusted once a month according to the evolution of the ranking in the macro variables. A ranking schedule is applied to the currencies, placing a 20% weight on the four top/bottom-ranked currencies, 15% for the fifth rank and 5% for the sixth-ranked currency. The BRICs/N-11 FX Current has a static, equally-weighted composition. See our Global Viewpoint from July 20, 2009, and our 2005 and 2006 issues of The Foreign Exchange Market for details.
The Current Account FX Current (Bloomberg: GSCUCACC Index) aims to capture the performance of current account geared trading strategies in FX. In an environment of slower global capital flows, one would expect current account surplus currencies to outperform current account deficit currencies. Owing to an improvement in global risk sentiment, the Current Account Current fell by 12.3% from its peak in March 2009 through November 2010. It ticked upwards at the end of 2010 but has been essentially flat since the start of 2011.
The Valuation Current (Bloomberg: GSCUVALU Index) is our FX Current built to capture the performance of undervalued currencies relative to overvalued currencies, using our GSDEER model as a valuation anchor. The Valuation Current is up 15.9% since the last major trough in July 2008. After a pullback between June and October 2010, the Current has rebounded by 2.0%. It has ticked down slightly (by about 50bp) over the last month.
95
100
105
110
115
120
125
130
135
140
2004 2005 2006 2007 2008 2009 2010 2011
Index,1/1/04=100
Relative Performance of HighYielding Currencies
FX G10 & Emerging Markets Carry Current
87
89
91
93
95
97
99
101
2004 2005 2006 2007 2008 2009 2010 2011
Index,1/1/04=100
Relative Performance of Currencies in Current Account Surplus FX
FX Current Account Current
94
96
98
100
102
104
106
108
110
112
114
2004 2005 2006 2007 2008 2009 2010 2011
Index,1/1/04=100
Relative Performance of Undervalued FX Based on GSDEER Valuation
FX Valuation Current
Short LongCNY BRLTWD HUFCHF ZARJPY TRYSGD IDRUSD INR
Composition of the Carry Current
Short LongTRY TWDNZD SEKPLN NOKUSD MYRINR CHFGBP SGD
Composition of Current Account Current
Short LongBRL ZARTRY SGDCHF TWDAUD NOKNZD MYRJPY CLP
Composition of Valuation Current
42
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
FX Currents
This Energy FX Current (Bloomberg: GSCUENER Index) is created to take advantage of terms-of-trade gains and losses from shifts in energy prices between commodity producers and commodity consumers. Basically, this Current is long a list of currencies from energy-exporting countries and short a portfolio of currencies that are heavy importers of energy products. Energy prices have been rising and we have seen a decent rebound in the Energy Current of 8.6% from the 2009 lows and about 1.2% since the start of 2011, although it has been range-bound recently. We expect this Current to continue appreciating over the medium term, given our Commodities Strategists’ structurally bullish commodity outlook.
The GDP FX Current (Bloomberg: GSCUGROW Index) is built to capture the performance of currencies from high cyclical growth economies relative to currencies from low cyclical growth economies. In theory, strong cyclical growth should lead to FX outperformance. Growth was one of the best-performing themes from the beginning of the turmoil in July 2007 through May 2010, during which the GDP Current was up by over 14.2%. It has fallen back 4.8% since then, although this downward trend has not been continuous.
The BRICs/N-11 FX Current (Bloomberg: GSCUBRIC Index) measures the outperformance of the BRICs and N-11 currencies against the G10 currencies. As the BRICs and N-11 are the emerging markets with the most substantial long-term growth potential, we would generally be inclined to recommend trading this Current from the long side. However, we have observed that the BRICs and N-11 trade can come under pressure during times of slow global growth. The BRICs/N-11 Current climbed 3.6% from January to May 2010, but has since fallen back 3.0%.
95
100
105
110
115
120
125
2004 2005 2006 2007 2008 2009 2010 2011
Index,1/1/04=100
Relative Performance of High Growth FX
FX Growth Current
96
98
100
102
104
106
108
110
2004 2005 2006 2007 2008 2009 2010 2011
Index,1/1/04=100
Relative Performance of Selected Energy-Exporting to Importing Currencies
FX Energy Current
98
100
102
104
106
108
110
112
114
116
2004 2005 2006 2007 2008 2009 2010 2011
Index,1/1/04=100
Relative Performance of BRIC/N11 Currencies to G10 Currencies
FX BRIC/N11 Current
Short LongNZD MXNRUB PHPAUD SGDCZK TWDKRW SEKMYR TRY
Composition of GDP Current
Short LongKRW NOKTWD RUBCNY MXNINR CADSGD NZDJPY MYR
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
GS Anecdotal Flows M&A Pipelines
Source: Thomson Financial SDC, GS. M&A Cash Pipelines show the value of the cash parts in all pending cross-border acquisitions. They represent potential flows, not actual flows. If a deal is withdrawn, it will be removed from the pipeline. The pipeline provides no information on the timing of foreign exchange flows.
* Pending United States outflow = -ve; Latest: US$ -31.5bn
Cash M&A Pipeline:Net bilateral: United States & REST OF WORLD *
99 00 01 02 03 04 05 06 07 08 09 10 11-60
-40
-20
0
20
40
60
80
100US$bn
* Pending Japan outflow = -ve; Latest: US$ -30.4bn
Cash M&A Pipeline:Net bilateral: Japan & REST OF WORLD *
Cash M&A Pipeline:Net bilateral: Euroland & REST OF WORLD *
99 00 01 02 03 04 05 06 07 08 09 10 11-100
-80
-60
-40
-20
0
20US$bn
* Pending United Kingdom outflow = -ve; Latest: US$ -30.2bn
Cash M&A Pipeline:Net bilateral: United Kingdom & REST OF WORLD *
99 00 01 02 03 04 05 06 07 08 09 10 11-80
-60
-40
-20
0
20
40US$bn
46
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
* Pending Australia outflow = -ve; Latest: US$ 7.4bn
Cash M&A Pipeline:Net bilateral: Australia & REST OF WORLD *
99 00 01 02 03 04 05 06 07 08 09 10 11-15
-10
-5
0
5
10
15
20
25US$bn
GS Anecdotal Flows M&A Pipelines
Source: Thomson Financial SDC, GS M&A Cash Pipelines show the value of the cash parts in all pending cross-border acquisitions. They represent potential flows, not actual flows. If a deal is withdrawn it will be removed from the pipeline. The pipeline provides no information on the timing of foreign exchange flows.
* Pending Sweden outflow = -ve; Latest: US$ -0.5bn
Cash M&A Pipeline:Net bilateral: Sweden & REST OF WORLD *
99 00 01 02 03 04 05 06 07 08 09 10 11-15
-10
-5
0
5
10
15US$bn
* Pending Norway outflow = -ve; Latest: US$ 3.6bn
Cash M&A Pipeline:Net bilateral: Norway & REST OF WORLD *
99 00 01 02 03 04 05 06 07 08 09 10 11-4
-2
0
2
4
6
8US$bn
* Pending China outflow = -ve; Latest: US$ 17.0bn
Cash M&A Pipeline:Net bilateral: China & REST OF WORLD *
99 00 01 02 03 04 05 06 07 08 09 10 11-5
0
5
10
15
20
25
30
35US$bn
* Pending India outflow = -ve; Latest: US$ 24.9bn
Cash M&A Pipeline:Net bilateral: India & REST OF WORLD *
99 00 01 02 03 04 05 06 07 08 09 10 11-5
0
5
10
15
20
25
30
35US$bn
* Pending New Zealand outflow = -ve; Latest: US$ 0.6bn
Cash M&A Pipeline:Net bilateral: New Zealand & REST OF WORLD *
99 00 01 02 03 04 05 06 07 08 09 10 11-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0US$bn
47
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
GSDEER
GSDEER Values and Misalignment for USD CrossesSpot
14-Jun-11 1Q11* Current (2Q11)* 3Q11 4Q12 Bilateral1
1 Bilateral misalignments are reported for the second currency in the pair w ith the exception of EUR/$, GBP/$, AUD/$, and NZD/$. A negative misalignment indicates that a currency is undervalued relative to its anchor currency. A negative trade-w eighted misalignment indicates that a currency is undervalued on a broad basis. That is, the $/JPY biateral misalignment show s the misalignment of the JPY against the USD, w ith a negative f igure indicating undervaluation of the JPY.* "Current" represents the current quarter, the column left of current represents the last quarter to be updated w ith over 75% of actual data.
48
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
GSDEER
GSDEER Values and Misalignment for Euro CrossesSpot
14-Jun-11 1Q11* Current (2Q11)* 3Q11 4Q12 Bilateral1
1 Bilateral misalignments are reported for the second currency in the pair w ith the exception of EUR/$, GBP/$, AUD/$, and NZD/$. A negative misalignment indicates that a currency is undervalued relative to its anchor currency. A negative trade-w eighted misalignment indicates that a currency is undervalued on a broad basis. That is, the $/JPY biateral misalignment show s the misalignment of the JPY against the USD, w ith a negative f igure indicating undervaluation of the JPY.* "Current" represents the current quarter, the column left of current represents the last quarter to be updated w ith over 75% of actual data.
49
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
**5Yr Forecasts are discussed in the Feature, "FX Trends During the Soft Patch", on page ii of this publication.
57
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
June 2011
Asia (cont'd) Global Markets Research Jan Hatzius~ 1(212)902-0394 Japan Portfolio Strategy Research Dominic Wilson~ 1(212)902-5924Dominic Wilson~ 1(212)902-5924 Hiromi Suzuki* 81(3)6437-9955 Francesco Garzarelli~ 44(20)7774-5078
Tsumugi Akiba* 81(3)6437-9966Kazunori Tatebe# 81(3)6437-9898 Global Macro Research
Andrew Tilton~ 1(212)357-2619 Kamakshya Trivedi* 44(20)7051-4005Zach Pandl* 1(212)902-3393 Pan-Asia Strategy Derivatives Research Stacy Carlson^ 1(212)855-0684Alec Phillips* 1(202)637-3746 Sam Gellman* 852-2978-1631Jari Stehn* 1(212)357-6224 Jason Lui# 852-2978-6613 Global Credit Strategy ResearchDavid Kelley 1(212)902-3053 Sunil Koul^ 852-2978-0924 Charles Himmelberg~ 1(917)343-3218
Alberto Gallo* 1(917)343-3214Latin America Economics Research Bangalore Service Desk Kenneth Ho* 852-2978-7468Paulo Leme~ 1(305)755-1038 Ram Dharmaraj# 1(212)934-9678 Lotfi Karoui* 1(917)343-1548Alberto Ramos~ 1(212)357-5768 Saikat Banerjee 1(212)934-1928 Anthony Ip# 852()2978-2676Eduardo Cavallo* 1(212)357-5772 Ketaki Garg 1(212)934-6319 Annie Chu^ 1(212)357-5522Petya Kehayova^ 1(212)934-0199 Vishal Vaibhaw 1(212)934-6319
FX ResearchUS Portfolio Strategy Research Australia & New Zealand Economics Research Thomas Stolper~ 44(20)7774-5183David Kostin~ 1(212)902-6781 Tim Toohey~ 613-9679-1079 Robin Brooks* 1(212)357-8763Stuart Kaiser* 1(212)357-6308 Philip Borkin* 649-362-7306 Themistoklis Fiotakis* 44(20)7552-2901Amanda Sneider* 1(212)357-9860 Andrew Boak# 612-9321-8576 Fiona Lake* 852-2978-6088Ben Snider^ 1(212)357-1744 David Colosimo# 613-9679-1085Yi Zhang^ 1(212)357-6003 Fixed Income Research
Europe, Middle East and Africa Constantin Burgi^ 44(20)7051-4009Asia Peter Oppenheimer~ 44(20)7552-5782Kathy Matsui~ 81(3)6437-9950 Macro Equity Research
European Economics Research Noah Weisberger~ 1(212)357-6261Asia-Pacific Economics Research Ahmet Akarli~ 44(20)7051-1875 Alexander Kazan* 1(917)343-4543Michael Buchanan~ 852-2978-1802 Kevin Daly~ 44(20)7774-5908 Aleksandar Timcenko* 1(212)357-7628Goohoon Kwon~ 82(2)3788-1775 Clemens Grafe~ 7(495)645-4198Enoch Fung* 852-2978-0784 Dirk Schumacher~ 49(69)7532-1210 Commodities Research Tushar Poddar* 91(22)6616-9042 Magdalena Polan* 44(20)7552-5244 Jeffrey Currie~ 44(20)7774-6112Helen (Hong) Qiao* 852-2978-1630 Natacha Valla* 33(1)4212-1343Yu Song* 852-2978-1260 Lasse Holboell Nielsen# 44(20)7774-5205 EnergyMark Tan* 65()6889-2472 Marek Raczko# 44(20)7552-0159 Samantha Dart* 44(20)7552-9350Shirla Sum# 852-2978-6634 Anna Zadornova# 44(20)7774-1163 Stefan Wieler# 1(212)357-7486Professor Song Guoqing 86(10)6627-3021 Antoine Demongeot^ 44(20)7774-1169 Johan Spetz 44(20)7552-5946Yin Zhang^ 86(10)6627-3112 Michael Hinds^ 44(20)7774-1137
Adrian Paul^ 44(20)7552-5748 Non-EnergyJapan Economics Research Damien Courvalin* 1(212)902-3307Naohiko Baba~ 81(3)6437-9960 European Portfolio Strategy ResearchChiwoong Lee* 81(3)6437-9984 Sharon Bell* 44(20)7552-1341 Commodity StrategyYuriko Tanaka* 81(3)6437-9964 Gerald Moser* 44(20)7774-5725 Allison Nathan~ 1(212)357-7504
Christian Mueller-Glissmann* 44(20)7774-1714 David Greely~ 1(212)902-2850Asia-Pacific Portfolio Strategy Research Anders Nielsen* 44(20)7552-3000Timothy Moe~ 852-2978-1328 Matthieu Walterspiler^ 44(20)7552-3403 AdministrationChristopher Eoyang~ 81(3)6437-9888 Linda Britten* 44(20)7774-1165Helen Zhu~ 852-2978-0048 Loretta Sunnucks* 44(20)7774-3223Kinger Lau* 852-2978-1224Caesar Maasry* 852-2978-7213Hanfeng Wang* 86(10)6627-3318Ben Bei# 852-2978-1220Jeen Kim# 82(2)3788-1726Chenjie Liu^ 86(10)6627-3324Richard Tang^ 852-2978-0722
~MD *VP/ED #Associate ^Research Assistant/AnalystEmail: f [email protected]
Goldman Sachs Global Economics, Commodities and Strategy Research
Americas
US Economics Research
58
The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research
