USD: Vicious Circle David Woo Head of Global FX Strategy, Barclays Capital
America is running both expansionary monetary and loose fiscal policies 15 Real Fed Funds rate
Budget balance as a share of GDP
percent
10 5 0
2
Mar-07
Mar-05
Mar-03
Mar-01
Mar-99
Mar-97
Mar-95
Mar-93
Mar-91
Mar-89
Mar-87
Mar-85
Mar-83
Mar-81
Mar-79
Mar-77
Mar-75
-10
Mar-73
-5
Periods of such policy stance were always characterized by a weak USD periods of negative real Fed Funds rate and budget balance<-3% of GDP real trade-weighted USD index against major currencies 140 130 120 110 100 90
3
Mar-07
Mar-05
Mar-03
Mar-01
Mar-99
Mar-97
Mar-95
Mar-93
Mar-91
Mar-89
Mar-87
Mar-85
Mar-83
Mar-81
Mar-79
Mar-77
Mar-75
70
Mar-73
80
Eurozone exporters may be suffering from the strengthening euro‌. US export to eurozone (USD, 6m/ 6m, SA, AR)
40
eurozone export to US (EUR, 6m/ 6m, SA, AR)
30
percent
20 10 0 -10
4
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
-30
Jan-95
-20
…but euro’s rise against the USD has been supported by evolving relative fundamentals
0
1.2
-1
1
-1.5
0.9
-2 Q1-08
Q2-07
Q3-06
Q4-05
Q1-05
Q2-04
Q3-03
Q4-02
Q1-02
Q2-01
Q3-00
Q4-99
-2.5 Q1-99
0.8
1 0
1.1
-1
1 -2
0.9 0.8
-3 Q1-08
-0.5
1.1
5
1.3
Q1-07
1.2
0.5
Q1-06
1.3
1.4
Q1-05
1
2
Q1-04
1.4
3
fiscal diff
1.5
Q1-03
1.5
real eur/ usd
Q1-02
2
1.5
1.6
Q1-01
2.5
real int diff
Q1-00
real eur/ usd
Q1-99
1.6
EUR/USD uptrend and oil uptrend are becoming mutually reinforcing
70
1.27
60
6
2/ 4/ 08
2/ 1/ 08
2/ 10/ 07
2/ 7/ 07
2/ 4/ 07
2/ 1/ 07
2/ 10/ 06
2/ 7/ 06
2/ 4/ 06
1.17
2/ 1/ 06
1.22
50
-40 -60 28/ 12/ 2007
1.32
-20
28/ 12/ 2006
80
1.37
0
28/ 12/ 2005
1.42
28/ 12/ 2004
90
20
28/ 12/ 2003
1.47
USD per barrel
100
1.52
40
28/ 12/ 2002
110
1.57
28/ 12/ 2001
Brent crude 6-month fut ures (right axis)
52 week rolling correlation between EUR/ USD and Brent futures
28/ 12/ 2000
1.62
60
28/ 12/ 1999
120
28/ 12/ 1998
EUR/ USD (left axis)
percent
1.67
USD’s vicious circle
7
This is the first time in twenty years that Eurozone inflation is rising while the Fed is cutting rates 5
Fed rate cut cycle
eurozone inflation (y/ y)
4.5 4 3.5 3 2.5 2 1.5 1
8
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
0
Jan-92
0.5
Increase in oil prices has prevented an improvement of US trade deficit, despite US slowdown and USD weakness Breakdown of US trade balance
10 0
-20 -30 -40 -50 -60
9
Indust rial supplies, excl petroleum goods
Consumer goods
Aut o and parts
Food, feeds, and beverages
Ot her goods Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
pet roleum goods Jan-90
-70
Capital goods
Jan-91
bln of USD
-10
Preconditions for a sustainable USD recovery • Sharp slowdown in China: such an event would dampen global marginal demand for oil, and, by triggering a correction of oil prices, break the vicious circle. • Big correction of the US equity market: there are no signs of any decoupling of ROW from US financial markets. Synchronized equity sell-off would be followed by synchronized global economic slowdown • Visible negative knock-on effect of USD decline on US asset prices: If further USD decline were to reduce appetite for US assets and drive down US asset prices, then US policy makers may be forced to change their ways 10
But if China is slowing at all, it is slowing very gradually 100
sales of vehicles (y/ y)
80
80
sales of vehicles (y/ y, 3-m MA)
60
China's crude oil imports (y/ y) 3-m MA
60 40 percent
percent
40 20
20 0
0
-20 -20
11
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
-60 Jan-00
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
-40
-40
Meanwhile, global oil inventory remains tight 360
US crude inventory
240
US gasoline stock
350 2008
230
340 330
2007
2006
2005
220
320 210
310 300
200
290
2008
2007
2006
2005
190
280 180
270 1
12
7
13
19
25 31 week
37
43
49
1
5
9 13 17 21 25 29 33 37 41 45 49 week
Bond vigilantes are suppressed by inelastic demand from reserve managers 140
160
Spread between 1 year IRS 9 year forward and 1 year IRS 4 year forward
140
Foreign official sector accumulation of USD assets (4Q-MA, left axis)
120
Foreign official sector accumulation of USD assets/ Current account (4Q-MA, right axis)
100
80 60 40
60 50
80
40 60
30
20
40
Q3-07
Q4-06
Q1-06
Q2-05
Q3-04
Q4-03
0
Q1-03
0
Q2-02
10
Q3-01
20
Q4-00
01/ 05/ 2008
01/ 01/ 2008
01/ 09/ 2007
01/ 05/ 2007
01/ 01/ 2007
01/ 09/ 2006
01/ 05/ 2006
01/ 01/ 2006
01/ 09/ 2005
01/ 05/ 2005
01/ 01/ 2005
01/ 09/ 2004
01/ 05/ 2004
01/ 01/ 2004
-20
20
Q1-00
0
13
70
percent
100
bln of USD
basis points
120
80
Positioning and sentiment indicate scope for further USD rally in the short-term is limited
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