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Deutsche Bank
Markets Research
Global
Foreign Exchange
FX Spot
Date
30 July 2013
Exchange Rate Perspectives
FX and the Financial Transaction Tax
Oliver Harvey
Macro strate ist
Deutsche Bank Securities Inc.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P)
054/04/2013.
EFTA01464308
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Table Of Contents
Currency
Forecasts
The Big Picture:
FX and the Financial Transaction Tax
5
Monitors:
G10 FX Valuation Monitor: Lines in the sand
18
Capital Flows and Basic Balances
25
Commodity Price and Currency Monitor
34
U.S. Trade
Balance
39
Central Bank Reserves Currency Composition Monitor
46
Page 2
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Currency Forecasts
Industrialized Countries
Currency
US $ Exchange Rates
U.S.
Euro
DB USD Index
EUR/USD
(Fwd. Rates)
Japan USD/JPY
(Fwd. Rates)
U.K.
Asia
Spot
3M 6M 12M
70 71 74 76
- --1.33
1.26 1.20 1.18
- 1.33 1.33 1.33
98 102 110 112
- 98 98 98
GBP/USD 1.53 1.47 1.41 1.40
(Fwd. Rates)
- 1.53 1.53 1.53
Canada USD/CAD 1.03 1.00 1.02 1.04
(Fwd. Rates)
- 1.03 1.03 1.04
Australia AUD/USD 0.92 0.98 0.98 0.95
(Fwd. Rates)
- 0.91 0.91 0.90
N.Z.
NZD/USD
(Fwd. Rates)
SwitzerlandUSD/CHF
(Fwd. Rates)
Euro Cross Rates
Japan EUR/JPY
U.K.
(Fwd. Rates)
EUR/GBP
(Fwd. Rates)
SwitzerlandEUR/CHF
Norway
Sweden
(Fwd. Rates)
EUR/NOK
(Fwd. Rates)
EUR/SEK
(Fwd. Rates)
EFTA01464310
0.80 0.80 0.80 0.77
- 0.80 0.79 0.78
0.93 0.99 1.04 1.06
- 0.93 0.93 0.93
130 129 132 132
- 130 130 130
0.86 0.86 0.85 0.84
- 0.86 0.86 0.87
1.23 1.25 1.25 1.24
- 1.23 1.23 1.23
7.86 7.35 7.25 7.15
- 7.88 7.91 7.97
8.58 8.25 8.05 8.00
- 8.60 8.62 8.66
Emerging Europe
Currency
Czech Rep. EUR/CZK
(Fwd. Rates)
USD/CZK
(Fwd. Rates)
Hungary EUR/HUF
Latin America
Currency
Argentina USD/ARS
(Fwd. Rates)
Brazil USD/BRL
(Fwd. Rates)
Chile USD/CLP
(Fwd. Rates)
Colombia USD/COP
(Fwd. Rates)
Spot
3M
6M 12M
5.49 5.60 5.98 6.62
- 4.63 4.87 5.33
2.26 2.12 2.15 2.17
- 2.31 2.35 2.44
509 505 502 500
- 516 521 531
1887 1910 1930 1950
- 1907 1924 1960
Mexico USD/MXN 12.7 12.6 12.1 11.9
(Fwd. Rates)
- 12.812.913.1
Poland
(Fwd. Rates)
USD/HUF
(Fwd. Rates)
EFTA01464311
Spot
3M
6M
12M
25.9 25.8 25.6 25.3
- 25.9 25.8 25.8
19.5 20.5 21.3 21.5
- 19.5 19.5 19.4
299 285 279 275
- 301 304 308
224 226 233 234
- 227 229 232
EUR/PLN 4.214.134.004.00
(Fwd. Rates)
- 4.24 4.26 4.31
USD/PLN 3.183.283.333.40
(Fwd. Rates)
- 3.20 3.21 3.25
Russia USD/RUB 32.8 31.8 31.8 32.0
(Fwd. Rates)
Turkey USD/TRY
(Fwd. Rates)
South Africa USD/ZAR 9.789.909.709.50
(Fwd. Rates)
- 30.3 30.9 31.5
1.921.941.951.98
- 1.96 1.99 2.07
- 9.90 10.04 10.32
Currency
Spot
3M
6M
12M
China USD/CNY 6.13 6.13 6.15 6.07
(Fwd. Rates)
- 6.17 6.20 6.25
Hong Kong USD/HKD 7 76 7.77 7.80 7.80
(Fwd. Rates)
USD/INR
India
(Fwd. Rates)
- 7.75 7.75 7.75
59.3 57.0 55.0 55.0
- 60.6 61.8 63.9
Indonesia USD/IDR 10278 10500 10500 10000
(Fwd. Rates)
Philippines USD/PHP 43.3 42.6 42.3 41.7
(Fwd. Rates)
- 10723 11000 11412
Malaysia USD/MYR 3.243.173.153.13
EFTA01464312
(Fwd. Rates)
- 3.26 3.27 3.30
- 43.3 43.4 43.6
Singapore USD/SGD 1.27 1.27 1.28 1.30
(Fwd. Rates)
- 1.27 1.27 1.27
South Korea USD/KRW 1112 1130 1120 1130
(Fwd. Rates)
- 1118 1122 1127
Taiwan USD/TWD 29.9 30.0 29.6 29.7
(Fwd. Rates)
- 29.9 29.8 29.7
Thailand USD/THB 31.1 30.5 30.0 30.0
(Fwd. Rates)
- 31.3 31.4 31.7
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Exchange Rate Perspectives: FX and the Financial Transaction Tax
G10 FX Forecasts: End of Quarter
Spot 2013
2014
2015
Q3 Q4 Q1 Q2 Q3 Q4 Q4
USD-crosses
EUR/USD 1.331.261.201.191 181.171.151.10
USD/JPY
GBP/USD 1.531.471.411.391.401.401.391.38
USD/CAD 1.031.001.021.031.041.041.051.10
AUD/USD 0.920.980.980.970.950.930.900.85
NZD/USD 0.800.800.800.790.770.750.720.68
USD/CHF
0.930.991.041.051.051.061.071.12
USD/SEK 6.486.716.886.836.786.796.877.05
USD/NOK 5.935.836.046.056.066.076.136.23
EUR-crosses
EUR/JPY
EUR/GBP
EUR/CHF
EUR/SEK
98 102 110 111 113 114 115 120
130 129 132 132 133 133 132 132
0.860.860.850.860.840.840.830.80
1.231.251.251.251.241.241.231.23
8.588.458.258.138.007.957.907.75
EUR/NOK 7.867.357.257.207.157.107.056.85
Page 4
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Exchange Rate Perspectives: FX and the Financial Transaction Tax
FX and the Financial Transaction Tax
T. In February 2013, the European Commission published a detailed proposal
of a Financial Transaction Tax (FTT) to be implemented based on an
'enhanced cooperation' agreement between 11 participating EU member
states.
T. The proposal will tax transactions in securities at 0.1% of notional value
and derivatives at 0.01%. The FTT will be levied on all transactions
involving financial institutions where one of the counterparties is
established in a participating member state and/or where the financial
instrument is issued in a participating member state.
The FTT would have wide ranging implications for the FX industry. While
FX spot transactions will not be taxed, forwards, swaps, NDFs and options
may be taxed. Transactions in these products would be taxed at the rate
for derivatives.
In its current form, the FTT would dramatically increase transaction costs
for FX market participants. This could result in the effective closure of the
non-spot FX market in participating member states.
T. The FTT would translate into substantial costs for the real economy. It
would be passed on to end users of FX derivatives, reducing corporate
competitiveness and acting as a tax on extra-EMU exports. The FTT would
also drain liquidity from markets, impair market efficiency and widen
bidoffer
spreads.
T. The design of the FTT may be incompatible with existing global efforts in
financial reform. By discouraging forms of financial intermediation, the FTT
appears to run counter to the goals of US and European legislation, which
are designed to encourage greater clearing and margining of transactions
in order to reduce credit risk.
The Bottom Line
On 22nd January 2013 the European Council gave the go ahead to 11 EU member
states to negotiate a Financial Transaction Tax (FTT).1
The European Commission
originally proposed an EU-wide FTT in September 2011. The three stated
objectives of the FTT were to avoid the fragmentation of the internal market
for
financial services, enhance the contribution of the financial services
sector to the
tax base and discourage financial transactions inconsistent with efficient
market
functioning. 2
After EU finance ministers failed to reach unanimous agreement on the
original
proposal, it was decided that progress would be made through a limited group
of
1 Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal,
Slovakia, Slovenia, Spain
2 A number of Eurozone states, including France and Italy, have already
introduced financial transaction
EFTA01464315
taxes at a national level. The goal of the European Commission was to
harmonize these efforts and
prevent an uncoordinated multi-approach system in Eurozone financial markets.
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Exchange Rate Perspectives: FX and the Financial Transaction Tax
member states. In February 2013, the European Commission published its
detailed
proposal of the FTT under the aegis of an enhanced cooperation agreement.3
The proposal closely mirrors that of the September 2011 original.
Transactions in
securities will be taxed at 0.1% of their notional value, transactions in
derivatives at
0.01% of their notional value. Financial institutions will be captured by
the tax with
a few exemptions. Non-financial institutions are not directly liable to pay
the FTT.
However, financial entities will be liable to pay when undertaking
transactions with
non-financial entities. Any trade involving a counterparty established in,
or a
financial instrument issued in a participating member state will be captured.
The FTT would have wide ranging implications for the FX industry. While FX
spot
transactions will not be taxed, forwards, swaps, NDFs and options may be
taxed.
These products currently make up nearly two thirds of FX market turnover.4
Transactions in these products would be taxed at the rate for derivatives.
While the
FTT is only being introduced in 11 member states, the extra-territorial
impact of the
FTT under the current proposal is wide, and would have a significant effect
on all
major global trading centres of foreign exchange.
The European Commission's proposal still has some way to go before it is
agreed,
let alone implemented. The eleven member states will continue to debate the
proposal until it achieves unanimous agreement. In recent weeks there has
been
speculation over the future of the FTT after participating member states
wrote to
the European Commission
for
acknowledged that implementation by the target date was unlikely.5
In its current form, the FTT would dramatically increase transaction costs
for FX
markets with the likely result of effectively closing the non-spot FX market
in
Europe. Indirect impacts would include changes to market structure, shifts
in the
behaviour of investors and hedgers and the relocation of global liquidity
hubs
In research carried out for the Global FX Division of the Global Financial
Markets
Association, Oliver Wyman estimated that the FTT would result in price
EFTA01464317
increases
of up to 1790% at the short end of the FX swap market (1 week EUR/USD swap)
and 270% at the long end (6 month EUR/USD swap). 6
transaction costs for FX swaps in recent years, the impact of the FTT would
be
comparable to the rise in transaction costs around the Lehman liquidity
crisis.
These costs would be magnified further by the FX market's high turnover and
deal
velocity. Many market participants roll shorter-dated FX forwards and swaps
for
liquidity management, asset-liability matching and short-term funding
purposes.
Each transaction would be captured by the FTT, while the impact on short-
dated
instruments is far higher than long-dated instruments.
The effective rate of the FTT would also be higher than the headline rate.
This is
because the FTT would apply to every step and, where applicable, leg of a
transaction. By definition, swaps and forwards trade with multiple legs and
often
3 The Enhanced Cooperation procedure allows member states to proceed with
integration within the
structures of the EU but without the participation of all member states.
4 BIS Triennial FX Survey, September 2010
50n 30th
May 2013 spokesperson for EC Tax and Customs Algirdas semeta acknowledged
that
implementation by the 2014 target date was 'unlikely.'
6 Proposed EU Commission Financial Transaction Tax Impact Analysis on
Foreign Exchange Markets,
Oliver Wyman January 2012
Page 6
Deutsche Bank Securities Inc
clarification on key details and EC officials
Looking at the average
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
involve very large notional amounts. The FX market is also intermediated,
with
several potential stages between client and ultimate liquidity provider.
We are concerned that the FTT would result in higher costs for end users of
FX
markets. Transactions between non-financial entities (e.g. corporate
clients) and
their dealers are not exempt from the FTT and higher transaction costs
incurred by
liquidity providers may have to be passed down. While non-financial entities
are
not primarily liable for payment, where the FTT goes unpaid both
counterparties
are jointly and severally liable, potentially introducing a new risk to
corporate
hedging decisions where none previously existed. A less liquid FX market
would
also mean non-financial
research suggests that financial transaction taxes lead to wider bid-offer
spreads.7
Since the stated purpose of policymakers in introducing the FTT is to
increase the
tax contribution of the financial sector in the interests of a level playing
field with
the non-financial sector, we think it is surprising that the proposal
contains no
exemption for transactions involving non-financial entities. As well as
being counter
to the goal of the proposal, this risks reducing the competitiveness of
European
companies. We calculate below that the FTT would impose a direct cost of
between EUR 1 to 2.4bn per year on German exporters and importers. The FTT
would, therefore, involve a significant direct cost for the real economy.
We believe the European Commission's proposal poses significant risk to
liquidity
and efficiency in the foreign exchange market. Historical examples of
financial
transaction taxes show significant declines in deal volume shortly after
their
introduction, while academic literature suggests that they impair market
efficiency
and liquidity.
We are also concerned that the proposal may offer market participants
economic
incentives that run counter to post-2008 international efforts at financial
reform. By
discouraging financial intermediation, the FTT flies in the face of mandatory
clearing rules introduced in the wake of the 2008 financial crisis. Were the
FTT to
EFTA01464319
apply to the exchange of margin, it would discourage some market participants
from collateralizing trades, hindering efforts to reduce counterparty credit
risk.
An understanding of how the FTT will apply to FX transactions is the key to
determining the impact on the FX market. We therefore begin our discussion
with
an outline of the current proposal.
How the Financial Transaction Tax Will Work
The FTT would be charged on all security transactions at a rate of 10bp and
all
derivative transactions at a rate of lbp. FX products which are eligible for
taxation
are FX forwards and swaps, NDFs and FX options. FX spot is excluded. The
European Commission had previously noted that a 'Tobin Tax,' on FX spot
transactions could run counter to EU law by restricting the free movement of
capita1.8
The Commission appears not to have extended this consideration to FX
swaps and forwards although there are questions as to whether they also
represent 'capital flows.'
entities have access to poorer pricing, as academic
7 Pomeranets and Weaver, Security Transaction Taxes and Market Quality, Bank
of Canada Working Paper,
November 2011
8 European Commission, Staff Working Document, Innovative Financing at a
Global Level, 1st
April 2010
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Exchange Rate Perspectives: FX and the Financial Transaction Tax
The FTT would apply to all financial institutions. Financial institutions
are defined as
investment firms, trading platforms or exchanges, insurance companies,
pension
funds, alternative investment funds, special purpose entities (SPEs) and
special
purpose vehicles (SPVs) and any other entity for which the average annual
value of
financial transactions constitute more than fifty percent of overall net
turnover.9
There are limited exceptions. Non-financial entities are not required to
pay, but
financial institutions transacting with non-financial entities are.
Moreover, nonfinancial
entities would be held jointly and severally liable if a financial
institution
fails to pay. Transactions with Central Counter Parties (CCPs), Central
Security
Depositories (CSDs) and International Central Securities Depositories
(ICSDs),
national debt management offices, member state central banks, the ECB and
other
international organizations do not fall under the FTT. The FTT would also
not be
charged on primary market transactions, or underwriting
The proposal envisages a broad territorial reach of the FTT. It would apply
to all
financial entities established in participating states. It would also apply
to all
financial entities transacting with a counterparty based in the
participating states.
Transactions involving securities issued within a participating member state
will
also be caught, irrespective of where the counterparties to the deal are
based. This
'issuance principle' is designed to strengthen anti-relocation provisions of
the FTT,
by making less desirable for entities established in participating states to
move
trading activities abroad. The issuance principle would apply to instruments
like
bonds and stocks. It is uncertain as to whether it would apply to the euro
currency.
Euros are issued by the ECB, an EU-established entity. It is not clear
whether eurodenominated
derivative contracts traded on an organized platform will be subject.
The proposal anticipates that the broker or settlement agent would be liable
for the
calculation for the FTT. For electronic transactions, collection and payment
EFTA01464321
is
assumed to be immediate. For other types of transactions, the proposal
suggests
that a period of three working days is an appropriate time period within
which the
FTT should be paid. The proposal does not state which counterparty should be
held responsible for paying the FTT, but that in the event the tax is not
paid, both
counterparties would be held jointly and severally liable.
Headline versus Effective Costs
The headline rates established by the European Commission are 10bp for
securities transactions and lbp for derivatives. However, the effective
rates for
financial transactions are higher. This is because the FTT is levied on a
gross basis,
at every stage of the transaction. This approach would cause a 'cascade
effect,'
whereby the effective tax rate increases in a linear fashion with the amount
of
intermediation in the deal.
The draft proposal distinguishes between financial institutions that are a
'party' to a
financial transaction and those that act on an 'agency' basis. 'Parties' are
required
to pay the FTT, while those acting on an 'agency' basis will not be caught.
There is
still a lack of clarity over which entities would fall under each definition
(for
example, whether the tax would capture a prime broker executing a 'give up,'
since the prime broker bears credit risk for the transaction). The FTT would,
however, appear to capture entities acting independently that facilitate a
single
9 European Commission, Proposal for a Council Directive, Implementing
Enhanced Cooperation in the Area
of Financial Transaction Tax, 14th
February 2013
Page 8
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Exchange Rate Perspectives: FX and the Financial Transaction Tax
transaction. For example, where a dealer provides liquidity to a financial
entity and
simultaneously hedges the same transaction with a third counterparty, all
three
entities are likely to be caught.
The FX industry would be impacted by this cascade effect. FX is an
intermediated
market, with several potential stages between the client and ultimate
liquidity
provider. These stages have evolved in response to demand for tighter
pricing and
a more efficient market. For example, in the case of an NDF transaction, a
dealer is
able to provide a better price for a client by being able to hedge that
transaction
through an offsetting one with a third counterparty. By discouraging this
kind of
intermediation, the FTT may result in dealers providing wider prices for
clients.
By definition many FX transactions also contain multiple legs, each of may be
subject to the FTT. For example, an FX swap is composed of two forward
transactions, meaning that the FTT could be charged twice. FX transactions
can
also involve very large notionals, which would increase gross costs.
As illustrated by the diagram below, a headline rate of lbp translates into
a much
higher effective rate once the multiple steps of a typical FX transaction is
taken into
account. In this case, the final cost for a USD/INR NDF potentially
increases up to
8bp, meaning the absolute cost for a USD 10,000,000 notional becomes USD
8,000.
Figure 1: The FTT 'Cascade Effect'
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Exchange Rate Perspectives: FX and the Financial Transaction Tax
There are questions as to whether the FTT will be levied on the exchange of
collateral but at the moment there is no clear exemption. Given that many FX
transactions are regularly collateralized, in some cases with the exchange of
variation margin on a more than a daily basis, this could involve a
substantial
increase in transaction costs. If the FTT was levied on initial margin, this
would also
increase costs.
The FTT would dramatically increase current transaction costs for FX
markets. In
research carried out for the Global FX Division of the Global Financial
Markets
Association, Oliver Wyman estimated that the FTT would result in price
increases
of up to 1790% at the short end of the FX swap market (1 week EUR/USD swap)
and 270% at the long end (6 month EUR/USD swap).
These extremely large increases in transaction costs are the result of the
very
small bid-offer spreads quoted by liquidity providers. In the most liquid FX
swaps,
such as a 1 week EUR/USD swap, spreads are often lower than one tenth of a
basis point. The FTT would therefore introduce a permanent cost to
transactions
magnitudes higher than is typical for these markets. Indeed, looking over
average
transaction costs for FX swaps over recent years, the impact of the FTT can
be
compared to the Lehman liquidity crisis in terms of its impact on
transaction costs.
These costs would be magnified by the FX market's high turnover and deal
velocity. The BIS estimates the total daily turnover in the swaps and
forwards
market alone to be USD 2.24 trillion, more than seven times that of all
global equity
markets.
Much of this liquidity is concentrated in shorter tenors. According to the
BIS, more
than 40% of global market turnover is concentrated in tenors of 1 week or
less for
FX forwards. For FX swaps, this figure is 70%. FX swaps and forwards are
rolled
over on a daily or weekly basis by a wide range of market participants in
order to
meet a broad range of objectives. These include liquidity management,
assetliability
matching and short term funding. These transactions would be hit each
time by the tax. Additionally, the impact of the FTT on short-dated
instruments is
much greater than on long-dated instruments.
EFTA01464324
Figure 2: The FTT Impact Similar to Global Financial Crisis on Transaction
Costs
bid-offer spread for FX fonvard points expressed as a percentage of
the FX market rate. Data from Bloomberg Finance LP.
Page 10
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Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 3: FX Forwards Percentage Global Turnover
Figure 4: FX Swaps Percentage Global Turnover
10
20
30
40
50
60
0
Up to 7 days
7 days -1 year
Over 1 year
Participating member states
Global
10
20
30
40
50
60
70
80
0
Up to 7 days
7 days -1 year
Over 1 year
Participating member
states
Global
A Tax on the Real Economy
Many have noted that the proposed FTT would have wide-ranging negative
implications for financial markets, reducing trading volumes, disrupting
short
term funding markets and curtailing the profits of financial firms.10
The FTT would also have a significant impact on the real economy. The fact
that the proposal does not exempt transactions involving non-financial
corporations would result in costs being passed down to end users of
derivatives. This would make hedging financial risks more expensive and less
attractive, potentially increasing the volatility of firms' cash flow and
share
prices.
Non-financial corporations use FX derivatives to hedge cash flow and balance
sheet risks arising from currency fluctuations. As the largest economy among
the participating member states and one of the foremost proponents of the
FTT, a useful case study is the impact the tax would have on German importers
and exporters.
Surveys suggest that an overwhelming majority of German corporates use
EFTA01464326
derivatives to hedge FX risks.11
Using a simple approach based on German
trade and BIS data, assumptions about hedging ratios, hedge rollovers and
basis point cost per transaction, we calculate that the FTT would impose an
annual cost of anywhere between EUR 1 to 2.4bn on German importers and
exporters. Using export elasticities from the IMF we calculate that German
exports could be reduced by as much as EUR 3.3bn per year.
In recent years, German exports to outside the Eurozone have grown as the
economy has responded to weak demand in the single currency area.
Germany's relatively strong growth compared the rest of the Eurozone is in no
small part due to this flexibility, with exports to East Asia in particular
playing
an important role. The FTT would hamper Germany's export flexibility by
10 See, for example, International Capital Market Association report, 'The
Impact of the Financial
Transaction Tax on the European Repo Market, April 8th
2013
11Gordon Bodnar and Gunther Gebhardt, Derivatives Usage in Risk Management
by US and German NonFinancial
Firms, A Comparative Study, 1999
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Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 5: Ex-Euro Area German exports have gained share
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Jan-93 Dec-95 Nov-98 Oct-01 Sep-04 Aug-07 Jul-10
Euro-Area
Non-Euro Area
German exports,
mns. EUR
Figure 6: Two ways of measuring the FTTs impact on German trade
September 2010
Page 12
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Exchange Rate Perspectives: FX and the Financial Transaction Tax
imposing an effective tax on non-Euro area exports. Moreover, given our
economists' view that Eurozone growth is expected to significantly
underperform the rest of the world for some years to come, the opportunity
cost to German exporters is likely to be significant.12
As well as impacting non-financial corporations, the FTT would diminish
pensions, increase insurance premiums and may raise costs for retail
investors.
Despite extensive discussions with the European Commission, the pension
industry will not be excluded from the FTT. The European Commission
estimates that for actively managed pension funds the FTT could reduce final
pensions by as much as 8%.13
Market Impact
There have been numerous academic studies on the impact of financial
transaction
taxes on financial markets.
There is a broad consensus that financial transaction taxes reduce trading
volumes.
Schmidt (2007) estimated trading volume elasticities in foreign exchange
markets.
Based on a multilateral implementation of the tax which reduced the prospect
of
relocation of trading activities, he estimated an elasticity of -0.4 for the
world's four
most traded currencies (USD, EUR, JPY, GBP).
Empirical studies have largely focused on securities rather than derivatives
markets. Froot and Campbell (1994) found that the impact of the Swedish
equities
transaction tax on trading volumes was relatively modest. However, the
impact of
a tax introduced on bonds and bills of between 0.2 and 3bp in 1989 was
significantly larger, with bond trading volumes falling 85% in the first
week.
The Froot and Campbell study illustrates an important characteristic of
financial
transaction taxes. Where
the opportunity to migrate trading
activities to
jurisdictions outside of the tax regime exists, or an effective substitute
to a taxable
product is available, trading volumes of the taxable products within the tax
jurisdiction experience significant falls. In the case of Sweden, Froot and
Cambell
found that offshore investors were able to access liquidity, tax-free, from
offshore
markets in the same equity securities. This resulted in a greater fraction
of the
trade in these securities taking place abroad. In the case of bonds and
bills, market
participants were able to substitute these products for non-taxable products
EFTA01464329
such
as forward rate agreements (FRAs) and variable-rate notes (VRNs).
This has important implications for FX markets. FX is a highly globalized
industry
with multiple global
liquidity hubs. The portability of those FX transactions
impacted by the tax is, therefore, likely to be high. This would involve
liquidity
seekers from non-participating states currently transacting with dealers
based in
participating member states relocating business,
and liquidity seekers of
participating member states relocating their trading activities to foreign
liquidity
hubs. This may have the impact of effectively shutting down the non-spot FX
market in participating states.
12 DB Focus Europe, Europe Outlook 2013, A false sense of security, 14th
December 2012
13 European Commission Technical fiche, Pension funds in the context of the
FTT proposal Case study of
Dutch pension fund market, assuming pension fund follows 'active' strategy,
turning over 90% of assets
twice a year, and hedging 90% of its assets four times a year.
Deutsche Bank Securities Inc.
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EFTA01464330
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
A stated goal of the FTT is to reduce transactions that do not contribute to
market
efficiency. One aspect of efficient market functioning is the rapid
incorporation of
news into asset prices, or price discovery. Liu (2007) examined how market
efficiency evolved in line with financial transaction taxes in Japan. He
measured
price discovery using the autocorrelation of returns in the Japanese
securities
market. In a more efficient market, new information should be incorporated
immediately into asset prices. This should, in turn, reduce the
autocorrelation of
returns. Lui found that reductions in the financial transaction tax in the
securities
market reduced the autocorrelation of Japanese stock price changes,
suggesting
that financial transaction taxes diminish price discovery.
A key feature of an efficient financial market is liquidity. This can be
briefly
summarized as the ability to transact when needed at a reasonable price. The
best
measure of liquidity is the bid-offer spread. We have already noted how bid -
offer
spreads would widen by the amount of tax that 'cascades' down the
transaction.
The FTT may widen bid-offer spreads still further through secondary effects.
Academic evidence suggests that financial transaction taxes result in wider
bid
offer spreads. Pomeranets and Weaver (2011) study New York State Security
Transaction Taxes on the NYSE and AMEX stock markets throughout the 20th
century. They found that
correlation to bid-offer spreads.
Figure 7: Historically, financial transaction taxes have led to wider bid-
offer
spreads
Percentage change in New
York State Stock Transfer
Tax versus changes on
bid-ask spread on sample
stocks, NYSE & AMEX
exchanges
2
Jun-33
1.5
Mar-32
1
0.5
Oct-81
Jan-45
EFTA01464331
-0.6% -0.4% -0.2%
Aug-78
Oct-79
0
Oct-80
-0.5
0.0% 0.2% 0.4% 0.6% 0.8%
Changein tax
Quality, Bank of Canada Working Paper, November 2011
Wider bid-offer spreads would result in higher transaction costs for all
market
participants. In their research, Oliver Wyman estimated that based on a 70%
fall in
volumes, the most liquid G10 derivative products could see spreads widen by
110%, while in less liquid G10 products spreads could widen by as much as
200%. It is worth noting that under the European Commission's initial
assessment a fall in derivative trading of 90% in
participating countries was
anticipated, suggesting that the Oliver Wyman estimates were conservative.
Page 14
Deutsche Bank Securities Inc.
Jul-66
Aug-75
financial transaction taxes had a strong positive
impact
Change in bid-ask spread
EFTA01464332
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Global regulation and the FTT
A concern surrounding the FTT currently proposed by the European
Commission is that it offers economic incentives that conflict with existing
international efforts at financial market reform.
Because the FTT is imposed at every stage of a financial transaction it
discourages financial intermediation. Mandatory clearing rules introduced by
the Dodd Frank Act in the US and EMIR in Europe aim to reduce counterparty
credit risk by migrating OTC bilateral transactions to clearing houses. This
has
the effect of increasing transaction intermediation in cases where trades
were
bilaterally executed.
Central clearing is designed to reduce systemic risks in the financial
system.
The central counterparty (CCP) acts as buyer to every seller and seller to
every
buyer. In so doing, it is designed to centralize financial risks that were
previously dispersed between multiple counterparties. Central clearing
reduces
counterparty credit risk by requiring firms to post collateral against
potential
future losses on trades (initial margin) and the mark to market value of the
same trades (variation margin). Basel III rules are similarly designed to
encourage greater collateralization of OTC trades by imposing higher capital
requirements on banks for trades which are not collateralized.14
Many financial firms will be required to clear derivative transactions using
CCPs. Most non-financial corporations, however, will not. The FTT, therefore,
may discourage non-financial entities from centrally clearing derivative
transactions as doing so would incur higher transaction costs.
Under the current European Commission proposal, it is unclear whether the
FTT is to be applied to the exchange of collateral. If it were applied, this
would
clash with efforts to reduce counterparty credit risk. Again, financial
corporations are likely to be subject to prudential margin standards which
will
require them to collateralize trades even when they are not cleared.
Nonfinancial
corporations will likely not be subject to the same standards.
In the case of non-financial institutions that are not subject to prudential
margin requirements, a number of factors will determine whether they choose
to bilaterally margin uncleared derivative transactions, or trade via a
credit
value adjustment (CVA) approach where credit charges are incurred. These
include the cost of credit charges, the availability of high quality
collateral that
can be used as margin and the sensitivity to cash flow risk arising from
margining. If it were to tax the exchange of collateral, the FTT would
provide
an incentive for non-financial institutions to choose the CVA approach.
EFTA01464333
Other market efforts at reducing risk may be impacted by the FTT. For
example,
portfolio compression trades, where offsetting positions
are netted by
counterparties in order to minimize counterparty risk, may be subject to the
tax.
The FTT would have broad implications for all major trading centers of
foreign
exchange. Many international dealers provide liquidity to clients based in
participating member states. For example, London, which provides the world's
largest trading hub of foreign exchange, would be particularly adversely
impacted.
14 We examine the impact of OTC derivative regulation on FX markets in more
detail in our report:
Exchange Rate Perspectives How Regulation will Reshape FX Markets, Part 2,
31st
July 2012
Deutsche Bank Securities Inc
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
It is
also unclear as to whether the 'issuance principle' outlined in the
European Commission's proposal would apply to the euro currency and
eurodenominated
products. The ECB, which issues euro currency, is established in
Frankfurt, one of the participating member states. If it were, the FTT would
have far reaching effects across global financial markets given the euro's
status as the world's second most traded currency and the importance of
participating member states to the global economy.
Final thoughts
As of the time of writing, there is uncertainty surrounding the future of
the FTT.
In April, participating member states wrote to the European Commission to ask
for clarification on a number of key issues including how collection of
revenues
would work and how key terms such as 'purchase and sale' and 'netting and
settlement,' were defined.
The decision by the European Council to permit participating member states to
enact the FTT using 'enhanced cooperation' is now subject to a legal
challenge
by the UK government. In addition, a number of European policymakers have
expressed concerns over the tax, particularly concerning its impact on bank
funding and credit.15
Most recently, the media have reported that the FTT is
unlikely to be enacted in its current form. Last month, European Commission
officials have acknowledged that implementation of the tax by January 2014
now looks 'less likely.'16
In its current form, the FTT would have major adverse consequences for the FX
markets. It would dramatically increase transaction costs for market
participants. This could result in the effective closure of the non-spot FX
market in participating member states.
The FTT would result in substantial costs to the real economy. The tax would
be passed on to end users of FX derivatives, reducing corporate
competitiveness and acting as a tax on extra-EMU exports. The FTT would also
result in less liquid markets, impair market efficiency and widen bid-offer
spreads.
The design of the FTT may make it incompatible with existing global efforts
at
financial reform. By discouraging forms of financial intermediation, the FTT
potentially runs counter to the goals of US and European legislation, which
are
to encourage greater clearing and margining of transactions in order to
reduce
credit risk. Ultimately, we hope that policy makers will take note of these
considerations, and in particular take in the interests of non-financial
corporations, pension funds and the real economy in their decision making
process.
EFTA01464335
or examp e, un es ank President Jens Weidmann in a speech in Dresden,
24th
Banque de France Governor Christian Noyer, in remarks made to journalists
28th
16 Reuters Article, 'Europe Plans Major Scaling Back of Financial Trading
Tax,' 30th
Page 16
April 2013 and
May 2013
May 2013
Deutsche Bank Securities Inc.
EFTA01464336
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Legal Disclaimer: This article is intended to provide background information
only. Readers
should consult with their legal and compliance advisers as to the potential
impact of any
regulatory provisions noted in this article upon their respective businesses.
The author would like to thank Bilal Hafeez and Matt Holmes for their help in
writing this report.
Deutsche Bank Securities Inc.
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
G10 FX Valuation Monitor: Lines in the Sand*
Figure 1: The euro looks expensive and the dollar cheap
10
20
30
40
-20
-10
0
29.0
25.8
19.8
15.0
12.0 10.5
7.0
-2.3
-8.5
-12.3
NZD AUD CHF CAD EUR NOK GBP SEK USD JPY
Figure 2: The dollar is 9% cheap to fair value
100
110
120
130
60
70
80
90
USDTWI
PPP USDTWI
20% Band
60
70
80
90
100
110
120
130
Figure 3: EUR/USD: The euro is expensive though
remains within the 20% threshold _
Figure 4: USD/JPY: _The yen is very cheap to fair value
0.6
0.8
1.0
1.2
1.4
EFTA01464338
1.6
EUR/USD
PPP EUR/USD
20% Band
0.6
0.8
1.0
1.2
1.4
1.6
73 77 81 85 89 93 97 01 05 09 13
100
150
200
250
300
350
50
73 77 81 85 89 93 97 01 05 09 13
20% Band
USD/JPY
PPP USD/JPY
50
100
150
200
250
300
350
Figure 5: USD/GBP: GBP is expensive
Figure 6: USD/CHF: as well as CHF
0.25
0.35
0.45
0.55
0.65
0.75
0.85
0.95
20% Band
USD/GBP
PPP USD/GBP
73 77 81 85 89 93 97 01 05 09 13
0.25
0.35
0.45
0.55
0.65
EFTA01464339
0.75
0.85
0.95
0.8
1.3
1.8
2.3
2.8
3.3
3.8
20% Band
USD/CHF
PPP USD/CHF
0.7
1.2
1.7
2.2
2.7
3.2
3.7
73 77 81 85 89 93 97 01 05 09 13
*Our measure of relative PPP is calculated using long-term averages from
Jan-80 to Dec-04 and deflating by monthly CPI differentials. We refer to
current spot rates as "cheap" or "expensive" with explicit reference to this
measure of fair valuation; these statements are not intended in any way to be
"buy" or "sell" recommendations.
Page 18
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 7: USD/CAD: CAD overvaluation is being
unwound
Figure 8: USD/AUD: AUD is very expensive, beyond 20%
threshold
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
20% Band
USD/CAD
PPP USD/CAD
73 77 81 85 89 93 97 01 05 09 13
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
0.6
0.9
1.2
1.5
1.8
2.1
USD/AUD
20% Band
PPP USD/AUD
73 77 81 85 89 93 97 01 05 09 13
0.6
0.9
1.2
1.5
1.8
2.1
Figure 9: USD/NZD: .and so is NZD
Figure 10: EUR/JPY: The euro is very expensive against
the yen
0.5
1.0
EFTA01464341
1.5
2.0
2.5
3.0
USD/NZD
20% Band
PPP USD/NZD
73 77 81 85 89 93 97 01 05 09 13
0.5
1.0
1.5
2.0
2.5
3.0
100
150
200
250
300
350
400
450
50
73 77 81 85 89 93 97 01 05 09 13
EUR/JPY
20% Band
PPP EUR/JPY
50
100
150
200
250
300
350
400
450
Figure 11: EUR/GBP: Sterling is cheap against the euro
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
EUR/GBP
20% Band
PPP EUR/GBP
EFTA01464342
73 77 81 85 89 93 97 01 05 09 13
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Figure 12: EUR/SEK: SEK is very cheap versus the euro
10
11
12
4
5
6
7
8
9
10
11
12
EUR/SEK
20% Band
PPP EUR/SEK
73 77 81 85 89 93 97 01 05 09 13
4
5
6
7
8
9
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EFTA01464343
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 13: EUR/CHF: CHF is expensive against the euro
1.0
1.5
2.0
2.5
3.0
3.5
4.0
EUR/CHF
20% Band
PPP EUR/CHF
1.0
1.5
2.0
2.5
3.0
3.5
4.0
73 77 81 85 89 93 97 01 05 09 13
Figure 14: EUR/CAD: CAD is close to fair value against
euro
0.9
1.1
1.3
1.5
1.7
1.9
EUR/CAD
20% Band
PPP EUR/CAD
73 77 81 85 89 93 97 01 05 09 13
0.9
1.1
1.3
1.5
1.7
1.9
Figure 15: AUD/NZD: NZD is fair value against AUD....
0.6
0.8
1.0
1.2
1.4
1.6
1.8
AUD/NZD
20% Band
EFTA01464344
PPP AUD/NZD
73 77 81 85 89 93 97 01 05 09 13
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Figure 16: CAD/NZD: ....and is expensive against CAD
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
CAD/NZD
20% band
PPP CAD/NZD
73 77 81 85 89 93 97 01 05 09 13
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Figure 17: JPY/NZD: NZD is expensive against the yen
0.000
0.005
0.010
0.015
0.020
0.025
JPY/NZD
20% Band
PPPJPY/NZD
0.000
0.005
0.010
0.015
0.020
0.025
73 77 81 85 89 93 97 01 05 09 13
Figure 18: GBP/JPY: JPY is very cheap against GBP
EFTA01464345
100
200
300
400
500
600
700
800
0
73 77 81 85 89 93 97 01 05 09
GBP/JPY
20% Band
PPP GBP/JPY
100
200
300
400
500
600
700
800
0
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Deutsche Bank Securities Inc.
13
EFTA01464346
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
FX Behavioral and Fundamental Equilibrium Exchange Rates (BEER and FEER)*
Figure 1: USD-cross BEER and FEER valuations
10
20
30
40
-40
-30
-20
-10
0
29
24
20
15
10 10 8 8 7
-1
-5
-10
-15
-21
-26
-5
-6
11
8
4 2 2 1
2
-2 -2 -3 -4 -4 -4 -4
-1
-7 -9
-2
-6
-11 -11 -11 -12 -12 -13 -13 -14
-12
-21
-28 -28
-1
8 7
19
14
11
7
3
20
23
BEER
FEER
17
EFTA01464347
24
21
22
Figure 2: EUR/USD is a bit expensive vs. BEER FV
Figure 3: USD/JPY is now above fair value vs. BEER FV
0.6
0.8
1.0
1.2
1.4
1.6
1.8
EUR
BEER Fair Value
Spot
100.0
150.0
200.0
250.0
300.0
50.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
8082848688909294969800 0204060810 12
JPY
BEER Fair Value
Spot
Figure 4: GBP/USD is very undervalued vs BEER FV
2.5
GBP
2.0
BEER Fair Value
Spot
Figure 5: USD BIS TWI is fair value vs. BEER FV
1.5
100.0
110.0
120.0
130.0
140.0
80.0
90.0
1.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
*Sources: BIS, Bloomberg, Deutsche Bank. Notes: For details on model, see
Exchange Rate Perspectives, Jan-13. BEER model is relative PPP
adjusted for terms-of-trade and productivity effects.
EFTA01464348
(structural) surpluses/deficits. Over/undervaluation calculated off TWIs and
converted to USD-crosses using matrix algebra. EM graphs available upon
request.
Deutsche Bank Securities Inc.
Page 21
808284 86889092949698000204060810 12
BEER Fair Value
Spot
Relative FEER model is based on current account surpluses/deficits relative
to long-term
NZD
CHF
SGD
AUD
ILS
PHP
CAD
EUR
THB
CZK
BRL
MYR
IDR
HUF
COP
HKD
MXN
TRY
RUB
TWD
CNY
NOK
CLP
PLN
SEK
GBP
KRW
JPY
INR
ZAR
ARS
EFTA01464349
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 6: USD/CAD is cheap vs. BEER FV
Figure 7: AUD/USD is quite expensive vs. BEER FV
0.8
1.0
1.2
1.4
1.6
1.8
CAD
BEER Fair Value
Spot
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
0.4
0.6
0.8
1.0
1.2
1.4
AUD
BEER Fair Value
Spot
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Figure 8: NZD/USD is very expensive vs. BEER FV
Figure 9: USD/CHF is quite cheap vs. BEER FV
0.2
0.4
0.6
0.8
1.0
1.2
NZD
BEER Fair Value
Spot
0.5
1.0
1.5
2.0
2.5
3.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
CHF
BEER Fair Value
Spot
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Figure 10: USD/NOK is a bit expensive vs. BEER FV
EFTA01464350
10.0
2.0
4.0
6.0
8.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
NOK
BEER Fair Value
Spot
9.0
Figure 11: USD/SEK is expensive vs. BEER FV
12.0
SEK
BEER Fair Value
Spot
6.0
3.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Page 22
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 12: EUR/USD is cheap vs. FEER FV
Figure 13: USD/JPY is very cheap vs. FEER FV
0.6
0.8
1.0
1.2
1.4
1.6
1.8
EUR
Relative FEER Fair Value
Spot
100.0
150.0
200.0
250.0
300.0
350.0
50.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
8082848688909294969800 0204060810 12
JPY
Relative FEER Fair Value
Spot
Figure 14: GBP/USD is expensive vs. FEER FV
Figure 15: USD BIS TWI is a bit cheap vs. FEER FV
1.0
1.5
2.0
2.5
3.0
GBP
Relative FEER Fair Value
Spot
100.0
110.0
120.0
130.0
140.0
80.0
90.0
808284 86889092949698000204060810 12
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Relative FEER Fair Value
Spot
EFTA01464352
Figure 16: USD/CAD is quite cheap vs. FEER FV
Figure 17: AUD/USD is cheap vs. FEER FV
0.8
1.0
1.2
1.4
1.6
1.8
CAD
Relative FEER Fair Value
Spot
0.4
0.6
0.8
1.0
1.2
1.4
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
AUD
Relative FEER Fair Value
Spot
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 18: NZD/USD is fair value vs. FEER FV
Figure 19: USD/ CHF is bit expensive vs. FEER FV
0.2
0.4
0.6
0.8
1.0
1.2
NZD
Relative FEER Fair Value
Spot
0.5
1.0
1.5
2.0
2.5
3.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
CHF
Relative FEER Fair Value
Spot
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Figure 20: USD/NOK is close to. FEER FV
Figure 21: USD/SEK is expensive vs. FEER FV
10.0
2.0
4.0
6.0
8.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
NOK
Relative FEER Fair Value
Spot
10.0
12.0
2.0
4.0
6.0
8.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
SEK
Relative FEER Fair Value
Spot
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
G10 Capital Flows and Basic Balance Monitor
United States (USD bn)
Figure 1: The basic balance is on a recovery path over
the last one year
Figure 2: as non-treasury portfolio outflows have turned
positive
Figure 3: The private basis balance has been diverging
from the overall balance
Figure 4: as official inflows become significant
Figure 5: Official inflows inversely correlated with private
inflows since the late 1990s
Figure 6: Relative to the private basic balance, the dollar
is expensive
Deutsche Bank Securities Inc.
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 7: Net FDI outflows show no signs of abating
Figure 8: Portfolio flows were driven mostly by net bond
flows, while net equity flows remain modest
Figure 9: Official sector buying of US bonds is now
almost equal to private buying
Figure 10: Treasury purchase by private sector has fallen
substantially
Figure 11: No clear relationship between USD TWI and
UST purchases
Figure 12: Net equity flows turn positive
Page 26
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 13: Equity flows tend to respond with a lag to
market performance
Figure 14: The dollar is increasingly following net equity
flows
Figure 15: Generally inverse link between foreign interest
in USTs versus US equities
Figure 16: The dollar and agency & corp bond inflows
Canada (CAD bn)
Figure 17: The basic balance has generally been in a
downtrend since 2007
Figure 18: as net FDI outflows continue
Deutsche Bank Securities Inc.
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 19: Portfolio inflows seem to have peaked after an
upsurge since 2008
Figure 20: as foreign interest in Canadian securities has
fallen from record highs
Figure 21: Net equity outflows continue unabated
Figure 22: while net debt inflows have started
moderating from record highs.
Japan (JPY trillion)
Figure 23: The negative basic balance has been
accelerating recently...
Figure 24: ...as net FDI outflows remain large
Page 28
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 25: Net capital inflows have turned positive
Figure 26: Net bond outflows have decelerated
Figure 27: Net equity flows have turned positive
Figure 28: Net money-market inflows have fallen
United Kingdom (GBP bn)
Figure 29: : The basic balance remains negative
Figure 30: Net FDI inflows have turned course
Deutsche Bank Securities Inc.
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30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 31: Portfolio outflows reach record highs
Figure 32: Net equity and net debt positions
Figure 33: Net holdings of equities
Figure 34: Net debt holdings
Euro area (EUR bn)
Figure 35: The basic balance remains in an uptrend...
Figure 36: ...as current account surplus outweighs the
FDI outflows
Page 30
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Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 37: EUR/USD strongly correlated (0.88) with
bilateral basic balance with the US
Figure 38: Bilateral basic balance explains 84% of
EUR/USD movements since inception of the euro
Figure 39: The bilateral basic balance with the US has
moved in favor of the US recently...
Figure 40: _as US purchases of euro area bonds have
continued to be replaced by sales
Figure 41: Net portfolio flows have turned inwards...
Figure 42: ...as equity inflows surpass the bond outflows
Deutsche Bank Securities Inc.
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EFTA01464362
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 43: Equity inflows have tracked the STOXX
Figure 44: Foreign interest on the bond side boomed in
late 2006 and has slowed now
Australia (AUD bn)
Figure 45: The basic balance remains negative
Figure 46: ...in spite of net FDI inflows
Figure 47: Net Portfolio flows have been falling since
2010
Figure 48: Foreign investors have favored Australian debt
(negative IIP a liability for AU)_
Page 32
Deutsche Bank Securities Inc.
EFTA01464363
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 49: ...and to a lesser extent equities...
Figure 50: _with relatively modest purchases by
Australians of foreign debt
New Zealand (NZD bn)
Figure 51: The basic balance
Figure 52: FDI flows
Figure 53: Net Portfolio inflows have switched to positive
territory
Figure 54: Foreign appetite for government bonds
Deutsche Bank Securities Inc.
Page 33
EFTA01464364
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Commodity Price and Currency Monitor
Figure 1: CRB Commodity Prices and components
100
300
500
700
900
1100
1300
Raw industrial
Foodstuffs
Metals
Livestock and products,(rhs)
Fats and Oil,(rhs)
CRB Commodity Prices,(rhs)
100
200
300
400
500
600
700
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Figure 2: Energy prices
100
120
140
160
20
40
60
80
0
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
Oil
Price(WTI, $/barrel)
Natural Gas ($/mmbtu),(rhs)
16
EFTA01464365
12
8
4
0
Figure 3: Precious metals
Figure 4: Industrial metals
1000
1500
2000
2500
500
0
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Gold Price (US$/Troy oz)
Platinum Price ($/Troy oz)
Palladium Price ($/Troy oz)
Silver Price ($/Troy oz) ,(rhs)
13
18
23
28
33
38
43
48
3
8
10000
2000
4000
6000
8000
0
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Aluminium Price ($/Metric Tonne)
Copper Price ($/Metric Tonne)
Lead Price ($/Metric Tonne)
Zinc Price ($/Metric Tonne)
Nickel Price ($/Metric Tonne),(rhs)
Tin Price ($/Metric Tonne),(rhs)
10000
20000
30000
40000
50000
60000
0
EFTA01464366
Figure 5: Commodity Currencies and Prices
Figure 6: The dollar cycle and global growth cycle
0.35
0.50
0.65
0.80
0.95
1.10
AUD/USD
CAD/USD
NZD/USD
CRB (Rs)
200
250
300
350
400
450
500
550
600
86 88 90 92 94 96 98 00 02 04 06 08 10 12
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
yoy,%
Correlation over entire sample = -0.07
Correlation from May 2000 = -0.01
Ln
World IP
USTW$, inverted,(rhs)
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
5
Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09 Jan-13
Page 34
Deutsche Bank Securities Inc.
EFTA01464367
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 7: Nominal CRB and World IP Growth
Figure 8: Nominal CRB and the Dollar
5.3
5.5
5.7
5.9
6.1
6.3
6.5
Ln
Nominal CRB Index
World industrial Production(rhs)
yoy,%
10
15
-15
-10
-5
0
5
Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13
5.3
5.5
5.7
5.9
6.1
6.3
6.5
Ln
Nominal CRB Index
USTW$,inverted,(rhs)
Ln
4.20
4.30
4.40
4.50
4.60
4.70
Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13
Figure 9: Long-run Relationship- Nominal CRB
Figure 10: Long-run Relationship- Oil
4 8
5.1
5.4
5.7
6.0
6.3
EFTA01464368
6.6
Long-run elasticities:
TWI: -1.88,
World IP: 5.81
Real Interest Rate: -0.03
Ln
Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13
Nominal CRB Index
Fitted Nominal CRB Index
4.8
5.1
5.4
5.7
6.0
6.3
6.6
5.2
Ln
4.6
Elasticities:
Major TWI: -2.56
World IP: 0.03
R-square: 0.80
4
3.4
Oil Price
Fitted Oil Price
2.8
May-00 May-03 May-06 May-09 May-12
5.2
4.6
4
3.4
2.8
Figure 11: RBA Commodity Price Index (Nominal) and
AUD/USD
1.1
0.5
0.6
0.7
0.8
0.9
1
AUD (lhs)
RBA Commoditiy Price Index (rhs)
25
50
75
100
EFTA01464369
125
150
175
86 88 90 92 94 96 98 00 02 04 06 08 10 12
Figure 12: Long-run Relationship-AUD/USD
-0.7
-0.5
-0.3
-0.1
0.1
0.3
AUD
Long Run Relationship
Long-run elasticities:
Commodity Price: 0.41
US GDP: -0.48
88 90 92 94 96 98 00 02 04 06 08 10 12
-0.7
-0.5
-0.3
-0.1
0.1
0.3
Deutsche Bank Securities Inc.
Page 35
EFTA01464370
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 13: ANZ Commodity Price Index (Nominal) and
NZD/USD
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
250
NZD (lhs)
ANZ Commodity Prices Index (rhs)
200
150
100
50
86 88 90 92 94 96 98 00 02 04 06 08 10 12
Figure 14: Long-run Relationship-NZD/USD
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
NZD
Long Run Relationship
Long-run elasticities:
Commodity Price: 0.77
GDP: 1.08
-0.9
-0.7
-0.5
-0.3
-0.1
0.1
88 90 92 94 96 98 00 02 04 06 08 10 12
Figure 15: BoC Commodity Price Index (Nominal) and
CAD/USD
0.60
0.70
0.80
0.90
EFTA01464371
1.00
1.10
CAD (lhs)
BoC Commodity
Price Index
200
300
400
500
600
700
800
900
1000
86 88 90 92 94 96 98 00 02 04 06 08 10 12
Figure 16: Long-run Relationship-CAD/USD
0.10
CAD
Long Run Relationship
0.20
-0.10
0.10
-0.30
0.00
Long-run elasticities:
Commodity Price: 0.13
GDP: 1.32
-0.50
88 90 92 94 96 98 00 02 04 06 08 10 12
-0.10
Figure 17: BoC Non-Energy Commodity Price Index
(Nominal) and CAD/USD
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
CAD (lhs)
BoC Non-Energy Commodity Price Index (rhs)
100
200
300
400
500
EFTA01464372
600
86 88 90 92 94 96 98 00 02 04 06 08 10 12
Figure 18: BoC Energy Commodity Price Index (Nominal)
and CAD/USD
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
CAD (lhs)
BoC Energy Commodity Price Index (rhs)
100
600
1100
1600
2100
2600
86 88 90 92 94 96 98 00 02 04 06 08 10 12
Page 36
Deutsche Bank Securities Inc.
EFTA01464373
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 19: RBA Commodity Price (Nominal)
Figure 20: RBA Commodity Price (Real)
100
125
150
175
25
50
75
86 88 90 92 94 96 98 00 02 04 06 08 10 12
RBA Commodity Price Index (Nominal)
Average
25
50
75
100
125
150
175
4.25
4.5
3.75
4
3.25
3.5
2.75
3
2.5
86 88 90 92 94 96 98 00 02 04 06 08 10 12
RBA Commodity
Price Index (Real)
Average
Linear Trendline
y = 3E-05x + 2.0822
R2 = 0.0717
4.25
4.5
3.25
3.5
3.75
4
2.5
2.75
3
Figure 21: ANZ Commodity Price (Nominal)
Figure 22: ANZ Commodity Price (Real)
110
EFTA01464374
130
150
170
190
210
230
250
90
86 88 90 92 94 96 98 00 02 04 06 08 10 12
ANZ Commodity Price Index (Nominal)
Average
110
130
150
170
190
210
230
250
90
4
86 88 90 92 94 96 98 00 02 04 06 08 10 12
4
4.8
4.6
y = -8E-06x + 4.585
R, = 0.0207
4.4
ANZ Commodity Price Index (Real)
Average
Linear Trendline
4.8
4.6
4.4
4.2
4.2
Figure 23: BoC Commodity Price (Nominal)
Figure 24: BoC Commodity Price (Real)
1000
200
400
600
800
0
86 88 90 92 94 96 98 00 02 04 06 08 10 12
BoC Commodity
Price Index
(Nominal)
EFTA01464375
Average
200
400
600
800
1000
0
6.2
5.2
5.4
5.6
5.8
6
4.8
5
BoC Commodity Price Index
(Real)
Average
Linear Trendline
6.2
y = -3E-05x + 6.3235
R2 = 0.1719
86 88 90 92 94 96 98 00 02 04 06 08 10 12
5.2
5.4
5.6
5.8
6
4.8
5
Deutsche Bank Securities Inc.
Page 37
EFTA01464376
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 25: BoC Non-Energy Commodity Price (Nominal)
100
150
200
250
300
350
400
450
500
BoC Non-Energy Commodity Price Index
Average
100
150
200
250
300
350
400
450
500
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Figure 26: BoC Non- Energy Commodity Prices (Real)
4.5
4.8
5.1
5.4
5.7
6
BoC Non- Energy Commodity
Price Index (Real)
Average
Linear Trendline
y = -5E-05x + 6.9082
R, = 0.6033
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
4.5
4.8
5.1
5.4
5.7
6
Figure 27: BoC Energy Commodity Price (Nominal)
Figure 28: BoC Energy Commodity Price (Real)
500
1000
1500
EFTA01464377
2000
2500
0
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
BoC Energy Commodity Price Index
Average
500
1000
1500
2000
2500
0
7.5
6.5
7
5.5
6
5
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
BoC Energy Commodity
Price Index (Real)
Average
Linear Trendline
7.2
7.4
6.2
6.4
6.6
6.8
7
y = 2E-05x + 5.5486
R, = 0.0292
5.2
5.4
5.6
5.8
6
5
Figure 29: Commodity Price Indices
Figure 30: Ratio of Commodity Price Indices
130
180
230
280
330
380
430
480
530
EFTA01464378
80
86 88 90 92 94 96 98 00 02 04 06 08 10 12
RBA Commodity Price Index (Nominal)
ANZ Commodity Price Index (Nominal)
BoC Commodity Price Index (Nominal)
Jan 1986 =100
80
130
180
230
280
330
380
430
480
530
2.3
1.9
1.5
1.2
1.1
0.7
86 88 90 92 94 96 98 00 02 04 06 08 10 12
0 7
Ratio of Australia to
NZ Commodity Price
Indicies (Nominal)
Ratio of Canada to NZ
Commodity Price
Indicies (Nominal)
2.2
1.7
Page 38
Deutsche Bank Securities Inc.
EFTA01464379
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
U.S. Trade Balance Monitor
Figure 1: The US trade deficit continues to recover
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
USD Bn
Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12
Annualized Trade Balance
Annualized Trade Balance,3m
Sum
Annualized Trade
Balance,12m Sum
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
Figure 2: US and world industrial growth remains sedate
10
15
-15
-10
-5
0
5
yoy,%
10
15
World IP ex US IP
(YoY)
US IP (YoY)
Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12
-15
-10
-5
0
EFTA01464380
5
Figure 3: The narrowing in the deficit reflected a
outpacing of import growth by export growth
Figure 4: Recently export prices have receded sharply
while export volumes have increased slightly
15
25
-35
-25
-15
-5
5
10
20
30
Export Value Growth
Import Value Growth
Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12
Figure 5: Export prices tend to follow the dollar
12
yoy,%
-12
-8
-4
0
4
8
USTRBROA,inverted
(rhs)
Export Price
Ln
u
4.30
4.40
4.50
4.60
4.70
4.80
Jan-94 Dec-96 Nov-99 Oct-02 Sep-05 Aug-08 Jul-11
-40
-30
-20
-10
0
10
15
20
-20
-15
EFTA01464381
-10
-5
0
5
12
yoy,%
u
Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12
Export Volume
Export Price(rhs)
-12
-6
0
6
Figure 6: Export volume growth closely follows external
demand
10
15
20
-20
-15
-10
-5
0
5
Jan-94 Jan-98 Jan-02 Jan-06 Jan-10
yoy,%
Export Volume
World IP ex US IP(rhs)
15
5
-5
-15
Deutsche Bank Securities Inc.
Page 39
EFTA01464382
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 7: Export volumes have remained below trend
since 2001
4.4
4.5
4.6
4.7
4.8
4.9
7.6
Ln
Real Broad TWI
Export Volumes(rhs)
Ln
7.1
6.6
6.1
5.6
Figure 8: Export volume deviations from trend is no
longer correlated with moving average of dollar valuation
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
USDTWI,Deviations from Trend (8 Quarter
MA),inverted
Real Exports,Deviation from Trend (rhs)
Ln
Correlation = - 0.67
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
Figure 9: A brief end to the dollar upsurge doesn't seem
to bolster export volume growth
10
EFTA01464383
20
-20
-10
0
Jan-94 Jan-98 Jan-02 Jan-06 Jan-10
yoy,%
Export Volume
USTRBROA,inverted(rhs)
Ln
4.30
4.40
4.50
4.60
4.70
4.80
Figure 10: Recovery in import price is boosting the
volume during the past few months
10
15
20
-20
-15
-10
-5
0
5
yoy,%
12
17
22
Import Volume
Import Price (rhs)
Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12
-18
-13
-8
-3
2
7
Figure 11: Import price inflation has followed the dollar
Figure 12: Import volume growth has generally been
highly correlated with US domestic demand growth
10
15
20
25
-20
-15
-10
EFTA01464384
-5
0
5
Jan-94 Jan-98 Jan-02 Jan-06 Jan-10
Import Price
USTRBROA,inverted(rhs)
yoy,%
-12
-7
-2
3
8
13
10
15
20
-25
-20
-15
-10
-5
0
5
10
yoy,%
Jan-94 Jan-98 Jan-02 Jan-06 Jan-10
Import Volume
US IP(rhs)
-15
-10
-5
0
5
Page 40
Deutsche Bank Securities Inc.
Mar-80
Mar-84
Mar-88
Mar-92
Mar-96
Mar-00
Mar-04
Mar-08
Mar-12
Dec-81
Dec-85
Dec-89
Dec-93
Dec-97
EFTA01464385
Dec-01
Dec-05
Dec-09
Dec-13
EFTA01464386
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 13: U.S. Exports and Imports of Goods and Services (Balance of
Payments Basis) (last 13 months)
May Jun Jul Aug Sep Oc t Nov Dec Jan Feb Ma r Apr May
Unit s 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2013 2013
Exports
Imports
(US$ bn.) 184.2 185.2 183.4 182.1 186.8 182.7 185.2 188.7 186.7 187.1 185.2
187.6 187.1
(US$ bn.) 230.5 227.6 226.8 226.1 228.4 225.3 231.6 227.0 229.4 231.0 222.3
227.7 232.1
Trade Balance (US$ bn.)
Export & Import Growth
Exports
Imports
Growth Differential
-46.2 -42.4 -43.5 -44.0 -41.6 -42.7 -46.4 -38.3 -42.7 -43.8 -37.1 -40.1 -45.0
(y-o-y%) 4.6% 7.0% 2.2% 1.2% 3.1% 1.2% 3.9% 5.3% 4.0% 2.8% -0.7% 1.8% 1.5%
(y-o-y%) 3.1% 1.6% 0.8% 0.7% 1.2% -0.6% 2.5% -1.5% -0.7% 2.3% -5.1% -1.4%
0.7%
1.5% 5.4% 1.3% 0.5% 1.9% 1.8% 1.4% 6.8% 4.7% 0.5% 4.4% 3.2% 0.8%
Figure 14: U.S. Export and Import Orders (ISM Survey) (last 13 months)
May Jun Jul Aug Sep Oc t Nov Dec Jan Feb Ma r Apr May
Unit s 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2013 2013
Exports
Imports
(US$ bn.) 184.2 185.2 183.4 182.1 186.8 182.7 185.2 188.7 186.7 187.1 185.2
187.6 187.1
(US$ bn.) 230.5 227.6 226.8 226.1 228.4 225.3 231.6 227.0 229.4 231.0 222.3
227.7 232.1
Trade Balance (US$ bn.)
Export & Import Growth
Exports
Imports
Growth Differential
-46.2 -42.4 -43.5 -44.0 -41.6 -42.7 -46.4 -38.3 -42.7 -43.8 -37.1 -40.1 -45.0
(y-o-y%) 4.6% 7.0% 2.2% 1.2% 3.1% 1.2% 3.9% 5.3% 4.0% 2.8% -0.7% 1.8% 1.5%
(y-o-y%) 3.1% 1.6% 0.8% 0.7% 1.2% -0.6% 2.5% -1.5% -0.7% 2.3% -5.1% -1.4%
0.7%
1.5% 5.4% 1.3% 0.5% 1.9% 1.8% 1.4% 6.8% 4.7% 0.5% 4.4% 3.2% 0.8%
Figure 15: Regional Breakdown of U.S. Trade Balance (US$ bn.) (1998-2010)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Canada-51.9 -52.8 -48.2 -51.7 -66.5 -78.5 -71.8 -68.2 -78.3 -21.6 -28.5
-34.5 -31.8
Mexico
Brazil
-24.6 -30.0 -37.1 -40.6 -45.2 -49.9 -64.5 -74.8 -64.7 -47.8 -66.4 -64.5 -61.3
-3.4
1 5
U.K.-1.8
EFTA01464387
Japan
China
Hong Kong
South Korea
Singapore
Taiwan
U.S. Total
1.4
-7.5
4.4
3.3
1.4
-6.7
-9.0
4.7
1.4
-7.3
-9.1
-10.4 -12.5
6.5
-1.4
4.0
7.5
5.4
-7.5
-8.1
9.8
6.1
-1.5
-6.9
1.8
-5.0
6.0
-1.8
11.5
-1.4
11.2
4.6
11.6
Western Europe -59.4 -64.8 -88.4 -98.9 -112.8 -125.6 -118.5 -109.0 -93.9
-61.1 -60.8 -63.2 -66.4
Germany
-29.1 -29.1 -35.9 -39.3 -45.8 -50.6 -47.9 -44.7 -43.0 -28.2 -34.3 -49.5 -59.7
-0.7
-0.1
-81.6 -69.0 -70.0 -66.0 -76.2 -83.3 -89.7 -84.3 -74.1 -44.7 -60.1 -63.2 -76.3
-83.8 -83.1 -103.1 -124.1 -162.3 -202.3 -234.1 -258.5 -268.0 -226.9 -273.1
-295.4 -315.1
3.1
12.9
EFTA01464388
7 2
15.0
12.0
-16.1 -15.3 -13.8 -14.2 -13.0 -13.2 -15.5 -12.4 -11.4
17.5
6.5
-9.9
22.3
11.6
-9.8
32.0
12.1
32.0
-12.5 -13.0 -13.0 -13.2 -20.0 -16.2 -13.6 -13.2 -13.4 -10.6 -10.0 -13.2
2.7
10.3
-15.5 -14.5
-4773.8 -4500.8 -5071.2 -5782.8 -7067.4 -8290.8 -8814.4 -8579.2 -8820.5
-5469.5 -6909.2 -7854.6 -7881.2
Deutsche Bank Securities Inc.
Page 41
-16.6
EFTA01464389
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
U.S Exports-Imports by Commodity
Figure 16: U.S. Trade Balance Excluding China &
Petroleum (Monthly & Annual Balance)
Monthly (US$ bn.) (bars)
-40
-35
-30
-25
-20
-15
-10
-5
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Annual (US$ bn.) (line)
-400
-350
-300
-250
-200
-150
-100
-50
0
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
Figure 17: U.S. Trade Balance — Advanced Technology
Monthly (US$ bn.)
(bars)
Annual (US$ bn.)
(line)
20
40
60
-120
-100
-80
-60
-40
EFTA01464390
-20
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Figure 18: U.S. Trade Balance — Petroleum Products
Monthly (US$ bn.) (bars)
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Annual (US$ bn.) (line)
-500
-450
-400
-350
-300
-250
-200
-150
-100
-50
0
-35
-30
-25
-20
-15
-10
-5
0
Monthly (US$ bn.)
(bars)
Annual (US$ bn.) (line)
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
-400
-350
-300
-250
-200
-150
-100
-50
0
EFTA01464391
Figure 19: U.S. Trade Balance — Consumer Goods
Figure 20: U.S. Trade Balance — Capital Goods
Figure 21: U.S. Trade Balance — Industrial Supplies
Monthly (US$ bn.) (bars)
-4
-2
0
2
4
6
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Annual (US$ bn.) (line)
10
20
30
40
50
-30
-20
-10
0
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
Monthly (US$ bn.)
(bars)
Annual (US$ bn.) (line)
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
-450
-400
-350
-300
-250
-200
-150
-100
-50
0
Page 42
Deutsche Bank Securities Inc.
EFTA01464392
EFTA01464393
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 22: U.S. Trade Balance — Automotive
Figure 23: U.S. Trade Balance — Food & Beverages
Monthly (US$ bn.) (bars)
-16
-14
-12
-10
-8
-6
-4
-2
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Annual (US$ bn.) (line)
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
-2
-1
0
1
2
3
4
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Monthly (US$ bn.) (bars)
Annual (US$ bn.) (line)
10
15
20
25
30
-15
-10
-5
0
5
U.S. Bilateral Trade Balances by Country & Region
Figure 24: U.S. Trade Balance with China
-30
EFTA01464394
-25
-20
-15
-10
-5
0
Monthly (US$ bn.)
(bars)
Annual (US$ bn.)
(line)
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
-300
-250
-200
-150
-100
-50
0
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
Figure 25: U.S. Trade Balance with Japan
Monthly (US$ bn.)
(bars)
Annual (US$ bn.) (line)
-95
-85
-75
-65
-55
-45
-35
-25
-15
-5
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Figure 26: U.S. Trade Balance with the Pacific Rim
(Asia excluding China and Japan)
Figure 27: U.S. Trade Balance with OPEC
Monthly (US$ bn.) (bars)
-9
EFTA01464395
-8
-7
-6
-5
-4
-3
-2
-1
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Annual (US$ bn.) (line)
-85
-75
-65
-55
-45
-35
-25
-15
-5
-30
-25
-20
-15
-10
-5
0
5
Monthly (US$ bn.)
(bars)
Annual (US$ bn.) (line)
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
-200
-160
-120
-80
-40
0
Deutsche Bank Securities Inc.
Page 43
EFTA01464396
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 28: U.S. Trade Balance with Western Europe
Monthly (US$ bn.) (bars)
-14
-12
-10
-8
-6
-4
-2
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Annual (US$ bn.) (line)
-140
-120
-100
-80
-60
-40
-20
0
-12
-10
-8
-6
-4
-2
0
Monthly (US$ bn.)
(bars)
Annual (US$ bn.)
(line)
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Figure 29: U.S. Trade Balance with Canada
Figure 30: U.S. Trade Balance with Mexico
Figure 31: U.S. Trade Balance with Latin America
Monthly (US$ bn.) (bars)
-8
EFTA01464397
-7
-6
-5
-4
-3
-2
-1
0
1
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Annual (US$ bn.) (line)
10
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-6
-5
-4
-3
-2
-1
0
1
2
Monthly (US$ bn.)
(bars)
Annual (US$ bn.) (line)
10
20
-50
-40
-30
-20
-10
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
U.S Current-Account Balance Monitor
Figure 32: U.S. Current-Account Balance
(1980-2010)
Annualized Current Account as % of GDP
-7.0
-5.0
EFTA01464398
-3.0
-1.0
1.0
-7.0
-5.0
-3.0
-1.0
1.0
Mar-81 Mar-85 Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09 Mar-13
1200
600
-1800
-1200
-600
0
Figure 33: U.S. Savings and Investment
(Private & Government Sector Savings-Investment)
Private Sector Balance
Gov't Sector Balance
600
1200
-1800
-1200
-600
0
Mar-81 Mar-85 Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09 Mar-13
Page 44
Deutsche Bank Securities Inc.
EFTA01464399
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 34: U.S. Current-Account Balance (last 13 quarters) (US$ Billions)
01 201002 201003 201004 201001 201102 201103 201104 201101 201202 201203
201204 201201 2013
Balance on Goods
Balance on Services
Bal on Goods & Services
Investment Income
Unilateral Transfers
Bal on Current Account
-152.9 -165.3 -169.3 -162 6 -181.7 -187.7 -183.9 -190.9 -193.6 -186.5 -179.0
-182.4 -179.1
34.7 36.2
38.0 41.9
42.8 46.8
-32.0
-30.4
45.3 47.1
55.1 55.4
-35.3
-33.8
49.2 45.7
61.1 61.1
-32.0
50.7 51.2
-32.4
54.9 57.5
-32.8
-32.7
54.6 57.0 52.0
-32.3
-31.9
50.0 55.0 55.5
-118.3 -129.2 -131.3 -120 7 -136.4 -140.6 -134.7 -145.2 -142.9 -135.3 -129.0
-127.4 -123.7
43.8 44.2
-34.9 -30.4
-109.4 -115.4 -120.5 -104.2 -116.6 -118.9 -105.6 -116.6 -120.8 -110.5 -106.7
-102.3 -106.1
(annualized, as % of GDP) -3.1% -3.2% -3.3% -2.8% -3.1% -3.2% -2.8% -3.0%
-3.1% -2.8% -2.7% -2.6% -2.7%
Figure 35: U.S. Current-Account Balance (1998-2012) (US$ Billions)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012
Balance on Goods
Balance on Services
Bal on Goods & Services
Investment Income
Unilateral Transfers
Bal on Current Account
EFTA01464400
-445.8 -421.3 -474.5 -540.4 -663.5 -780.7 -835.7 -818.9 -830.1 -505.8 -645.1
-738.4 -735.3
69.0 59.5
57.1 49.4
25.2 43.7
-65.0
-71.8
58.2 72.1
65.1 68.6
44.2 101.5 147.1 119.7 183.9 227.0 198.6
82.4 122.2 131.8 126.6 150.4 178.5 195.8
-376.8 -361.8 -417.4 -491.0 -605.4 -708.6 -753.3 -696.7 -698.3 -379.2 -494.7
-559.9 -539.5
19.2 29.7
-58.8 -64.6
-416.3 -396.6 -457.2 -519.1 -628.5 -745.8 -800.6 -710.3 -677.1 -381.9 -442.0
-465.9 -475.0
(annualized, as % of GDP) -4.2% -3.9% -4.3% -4.7% -5.3% -5.9% -6.0% -5.1%
-4.7% -2.7% -3.0% -3.1% -3.0%
-34.5
-88.2 -105.7 -91.5 -115.1 -125.9 -122.5 -131.1 -133.1 -134.1
Figure 36: U.S. Savings-Investment & Net Foreign Investment (1998-2010) (US$
Billions)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Private Savings
Private Investment
Gov't Savings
Gov't Investment
Gov't-Sector Balance
Gross Savings
Gross Investment
Savings-Investment
Private-Sector Balance -396.0 -195.4
423.9 229.2
1376.2 1466.5 1656.8 1749.7 1894.6 1925.4 2079.5 1989.3 2282.7 2574.8 2834.8
2827.4 2840.3
1772.2 1661.9 1646.9 1729.7 1968.5 2172.3 2327.1 2295.2 2087.6 1549.3 1737.3
1854.9 2062.3
9.9
20.0
-73.9 -246.9 -247.6 -305.9 195.1 1025.5 1097.5 972.5 778.0
-95.9 -197.1 -155.9
-6.5 116.5
58.3 -374.5 -1019.0 -1064.1 -990.0 -847.0
304.3 322.0 343.5 355.8 372.3 392.0 425.1 456.4 497.2 506.9 505.5 480.2 472.3
119.6
-92.8 -439.4 -552.9 -528.2 -398.5 -308.6 -398.1 -871.7 -1525.9 -1569.6
-1470.2 -1319.3
1800.2 1695.7 1560.9 1552.6 1738.7 1918.9 2196.0 2047.7 1908.2 1555.8 1770.7
1837.5 1993.3
EFTA01464401
2076.5 1984.0 1990.4 2085.4 2340.9 2564.3 2752.2 2751.7 2584.7 2056.2 2242.9
2335.1 2534.6
-276.3 -288.3 -429.5 -532.8 -602.2 -645.4 -556.2 -704.0 -676.5 -500.4 -472.2
-497.6 -541.3
Statistical Discrepancy -134.0 -103.3
-22.1
16.6
-22.3
-95.1 -242.3
-12.0
-2.4 118.3
23.3
31.9
67.2
Net Foreign Investment -410.4 -391 6 -451.6 -516.1 -624.6 -740.5 -798.4
-716.0 -679.0 -382.1 -448.9 -465.7 -474.1
Deutsche Bank Securities Inc.
Page 45
EFTA01464402
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Central Bank Reserves Currency Composition Monitor
Figure 1: Official FX reserves have quadrupled reflecting
primarily the growth of EM holdings
Figure 2: Mature market (MM) reserves have grown only
modestly reflecting valuation & interest
Figure 3: Many countries report the currency
composition of reserves to the IMF, which publishes
them in aggregate form
Figure 4: The advanced countries (MM) all report
the composition of reserves to the IMF...
Figure 5: _while about half of emerging markets
report the currency composition of their reserves
Figure 6: The currency composition of (114 reporting
countries) total FX reserves: levels
Page 46
Deutsche Bank Securities Inc.
EFTA01464403
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 7: The USD share in world reserves fell during 200204;
then stabilized
Figure 8: Advanced country FX reserve holdings...
Source COFER, IMF, DB FX Research
Figure 9: _the dollar share in industrial country reserves
has been relatively stable
Figure 10: Ex-Japan (our estimate) industrial country
dollar and euro holdings have both risen
Figure 11: The share of euros and dollars is not very
different
Figure 12: EM holdings of dollars had climbed steadily
Deutsche Bank Securities Inc.
Page 47
EFTA01464404
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Figure 13: In EM, the main driver of reserve growth has
been intervention (in USD bn)
Figure 14: In EM, the dollar share fell steadily during
2002-04 then stabilized
Figure 15: First active diversification, then leaning
against the wind
Figure 16: China has steadily diversified away from USD
since 2004 (our estimates)
Page 48
Deutsche Bank Securities Inc.
EFTA01464405
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on
securities other than the primary subject of this
research, please see the most recently published company report or visit our
global disclosure look-up page on our
website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification
The views expressed in this report accurately reflect the personal views of
the undersigned lead analyst(s). In addition,
the undersigned lead analyst(s) has not and will not receive any
compensation for providing a specific recommendation
or view in this report. Oliver Harvey
Deutsche Bank Securities Inc.
Page 49
EFTA01464406
30 July 2013
Exchange Rate Perspectives: FX and the Financial Transaction Tax
Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be
found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to
review this information before investing.
2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade
ideas (known as SOLAR ideas) that are
consistent or inconsistent with Deutsche Bank's existing longer term
ratings. These trade ideas can be found at the
SOLAR link at http://gm.db.com.
3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended
only for "wholesale clients" within the
meaning of the Australian Corporations Act and New Zealand Financial
Advisors Act respectively.
Brazil: The views expressed above accurately reflect personal views of the
authors about the subject company(ies) and
its(their) securities, including in relation to Deutsche Bank. The
compensation of the equity research analyst(s) is
indirectly affected by revenues deriving from the business and financial
transactions of Deutsche Bank. In cases where
at least one Brazil based analyst (identified by a phone number starting
with +55 country code) has taken part in the
preparation of this research report, the Brazil based analyst whose name
appears first assumes primary responsibility for
its content from a Brazilian regulatory perspective and for its compliance
with CVM Instruction # 483.
EU countries:
Disclosures
relating to our obligations
under MiFiD
can be found at
http://www.globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company
name - Deutsche Securities Inc.
Registration number - Registered as a financial instruments dealer by the
Head of the Kanto Local Finance Bureau
(Kinsho) No. 117. Member of associations: JSDA, Type II Financial
Instruments Firms Association, The Financial Futures
Association of Japan, Japan Investment Advisers Association. This report is
not meant to solicit the purchase of specific
financial instruments or related services. We may charge commissions and
fees for certain categories of investment
advice, products and services. Recommended investment strategies, products
and services carry the risk of losses to
principal and other losses as a result of changes in market and/or economic
trends, and/or fluctuations in market value.
EFTA01464407
Before deciding on the purchase of financial products and/or services,
customers should carefully read the relevant
disclosures, prospectuses and other documentation. "Moody's", "Standard &
Poor's", and "Fitch" mentioned in this
report are not registered credit rating agencies in Japan unless "Japan" or
"Nippon" is specifically designated in the
name of the entity.
Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in
the securities referred to herein and may
from time to time offer those securities for purchase or may have an
interest to purchase such securities. Deutsche Bank
may engage in transactions in a manner inconsistent with the views discussed
herein.
Russia: This information, interpretation and opinions submitted herein are
not in the context of, and do not constitute,
any appraisal or evaluation activity requiring a license in the Russian
Federation.
Risks to Fixed Income Positions
Macroeconomic fluctuations often account for most of the risks associated
with exposures to instruments that promise
to pay fixed or variable interest rates. For an investor that is long fixed
rate instruments (thus receiving these cash
flows), increases in interest rates naturally lift the discount factors
applied to the expected cash flows and thus cause a
loss. The longer the maturity of a certain cash flow and the higher the move
in the discount factor, the higher will be the
loss. Upside surprises in inflation, fiscal funding needs, and FX
depreciation rates are among the most common adverse
macroeconomic shocks to receivers. But counterparty exposure, issuer
creditworthiness, client segmentation, regulation
(including changes in assets holding limits for different types of
investors), changes in tax policies, currency
convertibility (which may constrain currency conversion, repatriation of
profits and/or the liquidation of positions), and
settlement issues related to local clearing houses are also important risk
factors to be considered. The sensitivity of fixed
income instruments to macroeconomic shocks may be mitigated by indexing the
contracted cash flows to inflation, to
FX depreciation, or to specified interest rates - these are common in
emerging markets. It is important to note that the
index fixings may -- by construction -- lag or mis-measure the actual move
in the underlying variables they are intended
to track. The choice of the proper fixing (or metric) is particularly
important in swaps markets, where floating coupon
rates (i.e., coupons indexed to a typically short-dated interest rate
reference index) are exchanged for fixed coupons. It is
also important to acknowledge that funding in a currency that differs from
the currency in which the coupons to be
received are denominated carries FX risk. Naturally, options on swaps
(swaptions) also bear the risks typical to options
in addition to the risks related to rates movements.
EFTA01464408
Page 50
Deutsche Bank Securities Inc.
EFTA01464409
David Folkerts-Landau
Global Head of Research
Marcel Cassard
Global Head
CB&S Research
Asia-Pacific
Fergus Lynch
Regional Head
International Locations
Deutsche Bank AG
Deutsche Bank Place
Australia
TDeeult:II IIIIIIIIIIII
London EC2N 2EQ
United Kin dom
Tel:
Deutsc e an
Groge Gallusstrage 10-14
German
Tel:
Deutsc e an< ecurities Inc.
05
United States of America
Tel:
Deutsche Bank AG
Filiale Hongkong
International Commerce Centre,
es Inc.
Chiyoda-ku, Tokyo 100-6171
Japa
Tel:
Ralf Hoffmann & Bernhard Speyer
Co-Heads
DB Research
Germany
Andreas Neubauer
Regional Head
Guy Ashton
Chief Operating Officer
EFTA01464410
Research
Richard Smith
Associate Director
Equity Research
North America
Steve Pollard
Regional Head
Global Disclaimer
The information and opinions in this report were prepared by Deutsche Bank
AG or one of its affiliates (collectively "Deutsche Bank"). The information
herein is believed to be reliable and has been obtained from public
sources believed to be reliable. Deutsche Bank makes no representation as to
the accuracy or completeness of such information.
Deutsche Bank may engage in securities transactions, on a proprietary basis
or otherwise, in a manner inconsistent with the view taken in this research
report. In addition, others within Deutsche Bank, including
strategists and sales staff, may take a view that is inconsistent with that
taken in this research report.
Opinions, estimates and projections in this report constitute the current
judgement of the author as of the date of this report. They do not
necessarily reflect the opinions of Deutsche Bank and are subject to change
without notice. Deutsche Bank has no obligation to update, modify or amend
this report or to otherwise notify a recipient thereof in the event that any
opinion, forecast or estimate set forth herein, changes or
subsequently becomes inaccurate. Prices and availability of financial
instruments are subject to change without notice. This report is provided
for informational purposes only. It is not an offer or a solicitation of an
offer to buy or sell any financial instruments or to participate in any
particular trading strategy. Target prices are inherently imprecise and a
product of the analyst judgement.
Foreign exchange transactions carry risk and may not be appropriate for all
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arising from several factors, including the following: 1) foreign exchange
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negatively affect the value of the currency. Clients are
encouraged to make their own informed investment and/or trading decisions.
Past performance is not necessarily indicative of future results. Deutsche
Bank may with respect to securities covered by this report, sell to
or buy from customers on a principal basis, and consider this report in
deciding to trade on a proprietary basis.
Unless governing law provides otherwise, all transactions should be executed
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U.S. this report is approved and/or distributed by Deutsche
Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In
Germany this report is approved and/or communicated by Deutsche Bank AG
Frankfurt authorized by the BaFin. In the United Kingdom this
report is approved and/or communicated by Deutsche Bank AG London, a member
EFTA01464411
of the London Stock Exchange and regulated by the Financial Services
Authority for the conduct of investment business in the UK
and authorized by the BaFin. This report is distributed in Hong Kong by
Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea
Co. This report is distributed in Singapore by Deutsche Bank AG,
Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch, and
recipients in Singapore of this report are to contact Deutsche Bank AG,
Singapore Branch or Deutsche Securities Asia Limited, Singapore
Branch in respect of any matters arising from, or in connection with, this
report. Where this report is issued or promulgated in Singapore to a person
who is not an accredited investor, expert investor or institutional
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Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited,
Singapore Branch accepts legal responsibility to such person for the
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by Deutsche Securities Inc. The information contained in this report does
not constitute the provision of investment advice. In Australia, retail
clients should obtain a copy of a Product Disclosure Statement (PDS)
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the PDS before making any decision about whether to acquire the product.
Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of
Germany (Branch Register Number in South Africa: 1998/003298/10). Additional
information relative to securities, other financial products or
issuers discussed in this report is available upon request. This report may
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Copyright 0 2013 Deutsche Bank AG
GRCM2013PROD029921
EFTA01464412
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181.171.151.10IPv4
207.157.107.056IPv4
251.241.241.231IPv4
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1887 1910Phone
4060810Phone
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APPENDIXSWIFT/BIC
DISCLOSURESSWIFT/BIC
USTRBROAURL
http://gm.db.comURL
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsrURL
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