EFTA Document EFTA01464478

Global 28 February 2013 Special Report Exchange Rate Perspectives The Dollar is Back How China Rebalancing, the Great Rotation to the US and Abenomics Will Change the World Research Team Bilal Hafeez Strategist Deutsche Bank AG/London DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012. Foreign Exchange Global Markets Research Macro PROT0 28 February 2013 Exchange Rate Perspectives Table of Contents Currency Forecasts 3 The Big Picture: The Dollar Is Back 5 Monitors: G10 FX Valuation Monitor: Lines in the sand 12 Capital Flows and Basic Balances 18 Commodity Prices and Currencies 28 U.S. Trade Balance 33 Central Bank Reserves Currency Composition Monitor 41 Page 2 PROT1 Currency Forecasts Industrialized Countries Spot Currency Rate US $ Exchange Rates U.S. Euro Japan U.K. US$/Euro (Fwd. Rates) Yen/US$ (Fwd. Rates) US$/£ (Fwd. Rates) Canada C$/US$ (Fwd. Rates) Australia US$/A$ N.Z. (Fwd. Rates) US$/NZ$ (Fwd. Rates) Switzerland Sfr/US$ (Fwd. Rates) Euro Cross Rates Japan U.K. Yen/Euro (Fwd. Rates) £/Euro (Fwd. Rates) Switzerland Sfr/Euro (Fwd. Rates) Norway Nkr/Euro (Fwd. Rates) Sweden Skr/Euro (Fwd. Rates) China DB US$ Index 69 69 71 73 1.31 1.30 1.25 1.20 - 1.31 1.31 1.31 92 96 98 100 92 92 92 1.51 1.49 1.45 1.41 - 1.51 1.51 1.51 1.03 0.98 0.98 1.00 PROT2 - 1.03 1.03 1.03 1.02 1.04 1.02 1.00 - 1.01 1.01 0.99 0.82 0.83 0.82 0.80 - 0.82 0.81 0.80 0.93 0.96 1.00 1.04 - 0.93 0.93 0.93 120 125 123 120 - 120 120 120 0.87 0.87 0.86 0.85 - 0.87 0.87 0.87 1.22 1.25 1.25 1.25 - 1.22 1.22 1.22 7.48 7.30 7.20 7.10 - 7.51 7.54 7.61 8.45 8.20 8.10 8.00 - 8.47 8.49 8.54 Source: Datastream, Reuters, Bloomberg Finance LP, DB forecasts Hungary Indonesia IDR/USD 9,686 9,950 9,900 9,850 (Fwd. Rates) Malaysia MYR/USD 3.10 3.07 3.05 3.02 (Fwd. Rates) 3.12 3.13 3.16 Philippines PHP/USD 40.7 40.4 39.9 39.3 (Fwd. Rates) 40.7 40.7 40.8 Singapore SGD/USD 1.24 1.21 1.21 1.20 (Fwd. Rates) 1.24 1.24 1.24 South Korea KRW/USD 1,085 1,075 1,050 1,040 (Fwd. Rates) - 1,091 1,096 1,103 Taiwan TWD/USD 29.7 29.2 28.5 28.3 (Fwd. Rates) 29.6 29.5 29.3 Thailand THB/USD 29.8 30.0 30.0 30.0 (Fwd. Rates) 30.0 30.1 30.3 Source: Datastream, Reuters, Bloomberg Finance LP, DB forecasts Emerging Europe Spot Currency Rate Czech Rep. Koruna/Euro 25.6 25.0 24.5 23.8 (Fwd. Rates) PROT3 Koruna/US$ (Fwd. Rates) Forint/US$ (Fwd. Rates) Latin America Spot Currency Rate Argentina ARS/USD 5.04 5.18 5.50 6.10 (Fwd. Rates) Brazil Chile 4.63 4.87 5.33 BRL/USD 1.98 1.95 2.00 2.05 (Fwd. Rates) CLP/USD 473 476 490 505 (Fwd. Rates) 480 485 495 Colombia COP/USD 1,814 1,770 1,750 1,745 (Fwd. Rates) - 1,828 1,840 1,867 Mexico MXN/USD 12.8 12.7 12.6 12.2 (Fwd. Rates) Source: Datastream, Reuters, Bloomberg Finance LP, DB forecasts 12.9 13.0 13.2 2.00 2.03 2.08 Russia Turkey 3M 6M 12M Poland Zloty/US$ (Fwd. Rates) Ruble/US$ (Fwd. Rates) Lira/US$ (Fwd. Rates) South Africa Rand/US$ (Fwd. Rates) Forint/Euro 296 280 280 280 PROT4 (Fwd. Rates) 25.6 25.6 25.6 19.6 19.2 19.6 19.8 19.6 19.6 19.5 299 302 306 226 215 224 233 228 230 233 Zloty/Euro 4.16 4.06 3.96 3.80 (Fwd. Rates) 4.20 4.24 4.30 3.18 3.12 3.17 3.17 3.21 3.23 3.27 30.6 30.5 30.5 30.6 30.3 30.9 31.5 1.80 1.80 1.80 1.85 1.82 1.84 1.88 8.86 8.70 8.50 8.40 8.98 9.08 9.30 Source: Datastream, Reuters, Bloomberg Finance LP, DB forecasts 3M 6M 12M - 9,753 9,863 10,101 Hong Kong HKD/USD 7.76 7.77 7.80 7.80 (Fwd. Rates) India 7.75 7.75 7.75 INR/USD 53.7 53.5 53.2 51.5 (Fwd. Rates) 54.6 55.4 57.0 3M 6M 12M Asia Spot Currency Rate CNY/USD 6.23 6.25 6.20 6.12 (Fwd. Rates) 6.24 6.25 6.27 3M 6M 12M Page 3 PROT5 G10 FX Forecasts: End of Quarter Source: Deutsche Bank Page 4 PROT6 The Dollar Is Back: How China Rebalancing, The Great Rotation To US and Abenomics Will Change The World Bottom Line Almost all currencies appeared to have peaked against the dollar, and the more recent rise in USD/JPY suggest the broad dollar is embarking on a multi-year uptrend. Superior US growth should support the rotation from bonds to equities that will help the dollar. Abenomics shows the scope central banks outside of the US have to weaken their currencies against the dollar. China rebalancing away from investment provides a downside risk to the China- linked currencies that have done so well since 2008. All these trends are intertwined and together point to sustained dollar strength. In terms of forecasts, by 2015, we expect EUR/USD to reach 1.10, USD/JPY 115 and AUD/USD 0.85. Most EM FX will weaken against the dollar. If anything, we risk underestimating the extent of dollar strength in coming years. Dating The Dollar The dollar tends to follow long-term cycles lasting between 6 to 10 years. A combination of valuations extremes, current account imbalances, and turns in rate cycles and capital flows tend to presage the switch from one multi-year trend to another. The latest clearly identifiable trend for the dollar has been a downtrend that began in 2002 and likely ended in 2011 thus lasting 9 years (see Figure 1). This is one year short of the longest trend in the post-Bretton Figure 1: USD Uptrend Starting? 100 110 120 130 140 150 160 60 70 80 90 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Deutsche Bank, EcoWin, BIS. Turning points Real Broad Dollar PROT7 Nominal Dollar vs Majors 6yrs, up 67% 6yrs, down 18% 10yrs, down 46% 7yrs, up 43% 9yrs, down 40% (vs majors) 7 Page 5 PROT8 Figure 2: Currencies Have Trend Turn Against Dollar At Different Times 1978 USD TWI trough 1985 USD peak First group to turn Second group Final group AUD, NZD (Mar '75) JPY, CHF, NOK, EUR (45 months after 1st group) GBP, SEK (65m after 1st) JPY (Nov '82) EUR, CHF, GBP, SEK, NOK, NZD (28m after 1st) AUD, CAD (40m after 1st) 1995 USD trough 2002 USD peak 2011 USD trough? NZD* (Jun '88), AUD* CAD, GBP, SEK, NOK (45m after 1st) EUR, JPY, CHF (80m after 1st) NZD, EUR, CHF, NOK (Oct 2000) AUD, GBP, SEK (6m after 1st) JPY, CAD (15m after 1st) * The trend turn in the AUD and NZD against the dollar around the 1995 turn could be dated at different points, I pick the earlier date Source: Deutsche Bank, Bloomberg Wood era, which had lasted 10 years (1985-1995).Looking at the dollar against individual currencies, we find that that dollar does not turn against all currencies at the same time. For example, during the 1995 trend turn up in the dollar trade-weighted index, the dollar had earlier turned up against the AUD and NZD, and then some years later turned up against CAD, GBP. SEK, NOK and finally the dollar troughed last against the EUR, JPY and CHF in 1995 (see Figure 2). Interestingly since that period, the JPY has always been last currency to peak or trough against the dollar. If we broaden the universe of currencies to include emerging markets and we look at the past few years, all currencies appear to have peaked against the dollar from a purely mechanical perspective. That is, they are not currently traded at their PROT9 peaks. It would appear the first wave of currencies peaked against the dollar in 2008, which included the euro, while a second wave appear to have peaked in 2011 (see Figure 3). However, if we tighten our definition of currencies that have peaked to only count those that have not traded within 5% of their post-2002 highs over the past 3 months; we find that 70% of currencies have firmly peaked against the dollar. It would appear Asia-Pac FX is the group of currencies that has yet to clearly peak against the dollar. This group includes, the AUD, JPY, SGD and CNY (see Figure 4). It is this group that will likely provide the most definitive sign that the broad dollar uptrend has started. USD/JPY Rise Captures It All While three months ago, the JPY was within 5% of its highs against the dollar, it has clearly and firmly moved much weaker since then. Now it is trading 15% away from its highs, and most are confident that the USD/JPY trend has turned up. Figure 3: Majority of G10+EM Currencies Appear To Have Peaked Against Dollar proportion of currencies that have peaked against dollar 100% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% 02 03 04 05 06 07 08 09 10 11 12 13 Source: Deutsche Bank, EcoWin Peak defined as high between 2002 and 2013 Peak defined as high of last 3m being at least 5% lower than previous high* * Yet to peak with 5% rule: CNY, THB, PHP, SGD, TWD, MYR, NZD, AUD, JPY Figure 4: Dollar Yet To Firmly Turn Up Against Asia-Pac FX PROT10 100 110 40 50 60 70 80 90 Source: Deutsche Bank, Bloomberg USD/CNY (rhs) USD/JPY (rebased, lhs) USD/SGD (rebased, lhs) USD/AUD (rebased, lhs) 02 03 04 05 06 07 08 09 10 11 12 6.00 6.50 7.00 7.50 8.00 8.50 CAD, GBP (Nov '07) EUR, SEK, NOK (6m after 1st) JPY, CHF, AUD, NZD (45m after 1st) Page 6 13 PROT11 Figure 5: USD/JPY Broken Away From Rate Differentials 100 105 110 115 75 80 85 90 95 08 09 10 11 12 13 USD/JPY (lhs) 2y spread (bps,rhs) 200 100% 150 100 50 0 20% 40% 60% 80% -100% -80% -60% -40% -20% 0% 75 78 81 84 87 90 93 96 99 02 05 08 11 Source: Deutsche Bank, Bloomberg The significance of the USD/JPY turn higher should not be understated. It is perhaps the only currency pair that has captured all the major macro themes since the 2008: an aversion to crisis-prone regions, ultra-easy Fed policy, the Euro-area crisis, and the investment boom in China. All these have until recently been positive for the yen against the dollar, and indeed contributed to the all-time high seen in the yen. The fact that the yen has now so decisively turned lower suggests markets are entering a new regime. The notable shifts in market behaviour include the complete breakdown of the relationship PROT12 between relative interest rates and USD/JPY (see Figure 5) and the declining correlation between the dollar and equities, such that the dollar is no longer weakening in "risk-on" periods (see Figure 6). On the macro side, 2011 marked the period when US growth more clearly established a lead over Euro-area growth (see Figure 7). Since then, US investors have reduced their buying of foreign equities (see Figure 8). This capital flow is perhaps the most important one to track the beginning of dollar uptrends (see Exchange Rate Perspectives, December 2012). The end of 2012 has likely seen the low in real US yields, which has trended down since 2008 (see Figures 9,10). This suggests the Fed is unlikely to do further easing measures. And even if it Figure 7: US Growth Firmly Above Euro-Area's 10 -6 -4 -2 0 2 4 6 8 real GDP growth, rolling y/y, consensus forecasts used for 2013, Germany used pre-EMU Figure 8: US Investors Buying Less Abroad USD TWI (lhs) 100 110 120 130 140 73 75 77 79 81 83 85 87 89 91 94 96 98 00 02 04 06 08 10 12 US Euro-area 70 80 90 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Source: Deutsche Bank, Bloomberg US purchases of foreign equities (inverted, 24mms, % of GDP, rhs) -0.5% 0.0% 0.5% 1.0% PROT13 1.5% 2.0% Figure 6: Record Negative Correlation Between Dollar and Stocks Reversing Suggests Regime Change 2y correlation between USD TWI and S&P500 using ly rolling returns using levels Page 7 PROT14 .Figure 9: US Real Yields Turning Up -2 -1 0 1 2 3 4 5 US lOy real yields (lhs) US unemployment rate, inverted (rhs) 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 3 4 5 6 7 8 9 10 11 Figure 10: Lowest US Real Yields Outside Of Inflation Spikes Since 1800 10 20 30 -30 -20 -10 0 1800 1825 1850 1875 1900 1925 1950 1975 2000 Inflation 10 yields minus inflation Source: deutsche Bank, EcoWin did, currency markets are no longer reacting as strongly to such measures. Instead, other central banks are catching up to Fed easing, such as the BoJ since Abe's election (or even earlier the SNB in 2011), are having a distinctly bigger a more negative impact on their currencies over the dollar. Finally, the introduction of the OMT by the ECB in the summer of 2012 has seen the tail risk for the Euro-area significantly reduced. What Goes Up Must Come Down; The Link To China A new market regime would imply that many of the trends since 2008 will likely reverse. Identifying those trends would also help answer the question of what would happen if the PROT15 Fed exits QE, which has occupied market participants in recent months. At the core, two clear trends have been in play since 2008. First, ultra- easy monetary policy by the central banks of the crisis-hit economies in the developed world, notably the Fed and ECB. Second, emerging market growth outperformance, particularly China. Moreover, both trends are connected. Indeed, Fed easing has seen US real yields, and global liquidity increase, while Chinese growth outperformance has provided a destination for this Figure 11: Surge in China Investment And NonConventional Credit 30% 35% 40% 45% 50% 55% Investment share of Chinese GDP (lhs) % of credit outside of bank yuan loans (rhs) 0% 10% 20% 30% 40% 50% 60% 78 81 83 85 87 89 91 93 95 97 99 01 03 06 08 10 12 Figure 12: Cross-Border Banking Lending Going To China 10,000 12,000 2,000 4,000 6,000 8,000 0 84 85 87 89 91 93 95 97 99 01 03 05 07 08 10 12 Source: Deutsche Bank, BIS foreign claims on borrowers from ($bn): Developing ex-China (lhs) China (rhs) 100 200 300 400 500 600 PROT16 700 800 0 Page 8 PROT17 Figure 13: Top Ten Change In Cross-Border Bank Lending 100% 120% 140% 160% 180% 200% 20% 40% 60% 80% 0% change in foreign claims on borrowers since 2009Q1 -80% -70% -60% -50% -40% -30% -20% -10% 0% Figure 14: Bottom Ten Change In Cross-Border Lending change in foreign claims on borrowers since 2009Q1 Source: Deutsche Bank, BIS, I exclude countries that do not have liquid currencies Source: Deutsche Bank, BIS excess liquidity. The investment rate in China has grown annually since 2008, and is currently the second highest in the world, after the tiny African island nation of Sao Tome and Principe. This investment has been funded by non-traditional credit expansion (see Figure 11. Moreover, when looking at cross-border bank lending since 2008, the most rapid growth in the world has been to Chinese borrowers (see Figure 12). After that, other Asian countries and Brazil have seen the biggest increase in borrowing (see Figure 13). The biggest drops have been seen to European borrowers (see Figure 14). Other markets that have benefited from easy G3 liquidity and Chinese growth has been EM local bonds, "safe- haven" markets such as Japan (see Figure 15) and property in prime locations around the world, like central London (see Figure 16). A new market regime would therefore likely see a reversal of many of these trends or at the very least a moderation in their pace. From a currency perspective, it adds PROT18 to the case that Asia-Pac currencies, such as SGD and AUD, have likely seen their peak against the dollar, with risks skewed to the downside. Figure 15: Surge In Foreign Buying Of Japanese Funds 60 70 80 90 100 110 120 130 140 150 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 USD/JPY (inverted,lhs) Money market fund inflows (JPY tril, cumulative, rhs) 10 20 30 40 50 60 -20 -10 0 Figure 16: Prime London Has Benefited From Post-2008 Regime £1,000,000 £1,500,000 £2,000,000 £2,500,000 £3,000,000 £3,500,000 £4,000,000 £4,500,000 £500,000 £0 95 96 97 98 99 00 01 02 03 04 05 06 08 09 10 11 12 Source: Deutsche Bank, UK Land Registry average price of detached house in prime London (Kensington and Chelsea) Page 9 Norway Netherlands France Austria PROT19 Hungary Portugal Italy Ireland Spain Greece China Indonesia Thailand Brazil Taiwan Malaysia Philippines Hong Kong India Singapore PROT20 Figure 17: BoJ Balance Sheet Yet To Grow As Fast As Fed Or ECB 10% 15% 20% 25% 30% 35% 0% 5% 00 02 04 06 08 10 12 CNY, EUR, JPY and the rest: Where Next? The case for yen weakness is straightforward. We expect central bank balance sheet as share of GDP Figure 18: Japan's Narrow Basic Balance of Payments Very Negative BoJ ECB Fed "Abenomics" to see a more aggressive BoJ, perhaps using the 1930s as a template for recovery, when currency weakness was a clear support (see FX Strategy Weekly, 15 February, 2013). It should noted that the BoJ has yet to expand its balance sheet as much as the Fed or the ECB since 2008 (see Figure 17). The Bank of England also appears to be itching to ease policy in part to weaken the pound, perhaps in response to Abenomics. Outside of BoJ policy, the narrow basic balance of payments (current account + FDI) points to clear yen weakness (see Figure 18). The surge in money market funds inflows should also reverse (see chart). We expect USD/JPY to eventually rise to 115 by 2015 (and 100 by year-end and 110 by end-2014). These are higher than our previous forecasts. The negative growth gap with the US, similar interest rates (see Figure 19) and US investors buying less equities abroad should weigh on the euro. The ECB is unlikely to hike with Euroarea growth close to 0% and with Bo] and BoE actions leading to currency weakness. And of course, there are ongoing and well-known issues around the Euro-area crisis. We look for the euro to eventually head to 1.10 by 2015 (and 1.20 by year-end and 1.15 by end-2014). Figure 19: US/Euro Rate Spreads Sideways PROT21 -1.05 -0.55 -0.05 0.45 0.95 1.45 Detrended USD vs EUR(pre-99 DEM, lhs) 2y rate diff (rhs) -6 -4 -2 0 2 4 6 8 73 76 79 82 85 88 91 94 97 00 03 06 09 12 Figure 20: CNY Under- and Over-Valued 10 20 30 -40 -30 -20 -10 0 CNY overvaluation based on FEER (black) and BEER (grey) CNY overvalued 96 97 98 98 99 00 01 02 03 04 05 06 07 08 09 09 10 11 12 to return to lOy ave of current account (FEER) PPP adjusted for productivity and terms of trade (BEER Source: Deutsche Bank Page 10 PROT22 Figure 21: Almost All FX Weaken When Dollar Strengthens. levels correlation of currency against narrow dollar trade-weighted index 100% 25% 50% 75% -75% -50% -25% 0% Source: Deutsche Bank, EcoWin, We only expect modest CNY appreciation against the dollar. One measure of valuation points to only modest undervaluation (see Figure 20). Moreover, the decline in China's current account has been quite sharp. If China wishes to see a return of the current account balance back to its recent average, then the CNY would have to weaken (see Figure 20). Importantly, we expect the China-linked currencies such as AUD to weaken to 0.85 by 2015 (and 1.00 by year-end, 0.90 by end-2014). The risks around switching from an investment-led growth model to a consumption-base model, that is, China rebalancing, suggests the risks for these currencies are to the downside. Other currencies should broadly follow the dollar. Indeed, past correlations suggest that most EM currencies follow the narrow dollar trend (see Figure 21). The main exception is the Mexican peso which has tended to strengthen with dollar strength. Some of the high-yielding currencies such as TRY, INR, IDR and RUB have tended not to see their spot move with the dollar trend. Through all of these individual currency forecasts, the most important point is that the 9-10 years of dollar weakness is now behind us, and the beginning of a multi-year uptrend is unfolding. Bilal Hafeez, London, 1995-2011 2002-2011 G10 Asia EMEA Latam EUR JPY GBP CHF SEK NOK AUD NZD CAD PLN CZK HUF RUB TRY ZAR ILS MXN BRL CLP COP PEN KRW TWD SGD HKD CNY INR IDR PHP THB MYR PROT23 Page 11 PROT24 FX Valuation Monitor: Lines in the Sand (PPP)* Figure 1: The euro is expensive and the dollar cheap 10 20 30 40 -20 -10 0 34.8533.29 21.65 15.7815.69 11.9 6.60 1.50 AUD NZD CHF CAD NOK EUR GBP SEK JPY USD -3.24 -10.10 Source: DB FX Research Figure 3: EUR/USD: The euro is expensive though remains within the 20% threshold ... 0.6 0.8 1.0 1.2 1.4 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 60 70 80 90 Figure 4: USD/JPY: ...The yen is expensive 100 150 200 250 300 PROT25 350 50 Figure 5: USD/GBP: as well as sterling ... 0.25 0.35 0.45 0.55 0.65 0.75 0.85 0.95 20% Band USD/GBP PPP USD/GBP 0.25 0.35 0.45 0.55 0.65 0.75 0.85 0.95 Figure 6: USD/CHF: CHF is expensive 0.8 1.3 1.8 2.3 2.8 3.3 3.8 *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. 20% Band USD/CHF PPP USD/CHF 0.7 1.2 1.7 2.2 2.7 3.2 3.7 PROT26 20% Band USD/JPY PPP USD/JPY 50 100 150 200 250 300 350 Figure 2: The dollar is 12% cheap to fair value 100 110 120 130 USDTWI PPP USDTWI 20% Band 60 70 80 90 100 110 120 130 Page 12 PROT27 Figure 7: USD/CAD: CAD overvaluation is being unwound 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 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Figure 8: USD/AUD: AUD is very expensive, beyond 20% threshold... 0.6 0.9 1.2 1.5 1.8 2.1 USD/AUD 20% Band PPP USD/AUD 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 close to fair value against the yen 0.5 1.0 1.5 PROT28 2.0 2.5 3.0 USD/NZD 20% Band PPP USD/NZD 0.5 1.0 1.5 2.0 2.5 3.0 100 150 200 250 300 350 400 450 50 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 PROT29 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 4 5 6 7 8 9 Page 13 PROT30 FX Behavioral and Fundamental Equilibrium Exchange Rates (BEER and FEER)* Figure 1: USD-cross BEER and FEER valuations Figure 2: EUR/USD is a bit expensive vs. BEER FV Figure 3: USD/JPY is now fair value vs. BEER FV Figure 5: USD BIS TWI is a bit cheap vs. BEER FV Figure 4: GBP/USD is very undervalued vs. BEER FV *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. Relative FEER model is based on current account surpluses/deficits relative to long-term (structural) surpluses/deficits. Over/undervaluation calculated off TWIs and converted to USD-crosses using matrix algebra. EM graphs available upon request. Page 14 PROT31 Figure 6: USD/CAD is cheap vs. BEER FV Figure 7: AUD/USD is quite expensive vs. BEER FV Figure 8: NZD/USD is very expensive vs. BEER FV Figure 9: USD/CHF is quite cheap vs. BEER FV Figure 10: USD/NOK is a bit expensive vs. BEER FV Figure 11: USD/SEK is expensive vs. BEER FV Page 15 PROT32 Figure 12: EUR/USD is cheap vs. FEER FV Figure 13: USD/JPY is very cheap vs. FEER FV Figure 14: GBP/USD is expensive vs. FEER FV Figure 15: USD BIS TWI is a bit cheap vs. FEER FV Figure 16: USD/CAD is quite cheap vs. FEER FV Figure 17: AUD/USD is fair value vs. FEER FV Page 16 PROT33 Figure 18: NZD/USD is a bit expensive vs. FEER FV Figure 19: USD/CHF is fair value vs. FEER FV Figure 20: USD/NOK is expensive vs. FEER FV Figure 21: USD/SEK if fair value vs. FEER FV Page 17 PROT34 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 remain positive Source: DB FX Research and US Treasury 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 Source: DB FX Research and Haver Page 18 PROT35 Figure 7: Net FDI outflows accelerate 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 are 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 remain positive Page 19 PROT36 Figure 13: Equity flows tend to respond with a lag to market performance Figure 14: The dollar is increasingly following net equity flows Source: Deutsche Bank, US Treasury and Bloomberg Finance LP Source: Deutsche Bank, US Treasury and Bloomberg Finance LP Figure 15: Generally inverse link between foreign interest in USTs versus US equities Figure 16: The dollar and agency & corp bond inflows Source: Deutsche Bank and US Treasury Source: Deutsche Bank, US Treasury and Bloomberg Finance LP Page 20 PROT37 Canada (CAD bn) Figure 1: The basic balance has generally been in a downtrend since 2007 Figure 2: as net FDI outflows continue Figure 3: Portfolio inflows seem to have peaked after an upsurge since 2008 Figure 4: as foreign interest in Canadian securities has fallen from record highs Figure 5: Net equity outflows continue unabated Figure 6: .while net debt inflows have started moderating from record highs. Page 21 PROT38 Japan (JPY trillion) Figure 1: The negative basic balance has been accelerating recently... Figure 2: _as net FDI outflows gather momentum Source: DB FX Research, MOF, and Haver Source: DB FX Research and MOF Figure 3: Net capital inflows have turned negative Figure 4: Net bond outflows have accelerated Figure 5: Net equity flows have turned positive Figure 6: While Net money-market inflows have fallen substantially Page 22 PROT39 United Kingdom (GBP bn) Figure 1: The basic balance remains negative Figure 2: Net FDI inflows have turned course Figure 3: Portfolio flows remain negative Figure 4: Net equity and net debt positions Source: DB FX Research and BoE Figure 5: Net holdings of equities Figure 6: Net debt holdings Source: DB FX Research and BoE Source: DB FX Research and BoE Page 23 PROT40 Euro area (EUR bn) Figure 1: The basic balance has turned positive... Figure 2: ...as current account surplus outweigh the net FDI outflows Source: DB FX Research and Eurostat Figure 3: EUR/USD strongly correlated (0.88) with bilateral basic balance with the US Figure 4: Bilateral basic balance explains 84% of EUR/USD movements since inception of the euro Figure 5: The bilateral basic balance with the US has moved in favor of the US recently... Figure 6: ...as US purchases of euro area bonds have continued to be replaced by sales Source: Deutsche Bank and US Treasury Page 24 PROT41 Figure 7: Net portfolio inflows have turned marginally positive... Figure 8: _as equity market inflows outpace the money market outflows Source: Deutsche Bank and European Central Bank Source: Deutsche Bank and European Central Bank Figure 9: Equity inflows have tracked the STOXX Figure 10: Foreign interest on the bond side boomed in late 2006 and has slowed now Source: Deutsche Bank, Bloomberg and European Central Bank Source: Deutsche Bank and European Central Bank Page 25 PROT42 Australia (AUD bn ) Figure 1: The basic balance remains positive... Figure 2: ...as net FDI inflows continue to climb Source: DB FX Research and RBA Figure 3: Net Portfolio flows have been falling since 2010 Figure 4: Foreign investors have favored Australian debt (negative IIP a liability for AU)_ Figure 5: ...and to a lesser extent equities... Figure 6: ...with relatively modest purchases by Australians of foreign debt Page 26 PROT43 New Zealand (NZD bn ) Figure 1: The basic balance Figure 2: FDI flows Figure 3: Net Portfolio inflows have switched to negative territory Figure 4: Foreign appetite for government bonds Source: DB FX Research and NZ FinMin Page 27 PROT44 Commodity Price and Currency Monitor Figure 6: CRB Commodity Prices and components 1100 1300 100 300 500 700 900 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 Source: DB FX Research, Haver Figure 3: Precious 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 ($/Troy oz) ,(rhs) 13 18 23 28 33 38 43 48 3 8 Source: Deutsche Bank, Haver Figure 4: Industrial metals 10000 2000 PROT45 4000 6000 8000 0 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Figure 5: Commodity Currencies and Prices 0.35 0.50 0.65 0.80 0.95 1.10 AUD/USD CAD/USD NZD/USD CRB (Rs) 200 250 300 350 400 450 500 550 600 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Figure 6: The dollar cycle and global growth cycle -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 yoy,% Correlation over entire sample = -0.07 Correlation from May 2000 = -0.01 Ln World IP USTW$, inverted,(rhs) 4.2 4.3 4.4 4.5 4.6 4.7 4.8 PROT46 4.9 5 Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09 Jan-13 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 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) 12 16 0 4 8 Page 28 PROT47 Figure 7: Nominal CRB and World IP Growth 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 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 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 6.6 PROT48 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) 100 125 150 175 PROT49 25 50 75 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 Page 29 PROT50 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 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 1.00 PROT51 1.10 CAD (lhs) BoC Commodity Price Index 200 300 400 500 600 700 800 900 1000 Figure 16: Long-run Relationship-CAD/USD 0.10 CAD Long Run Relationship 0.20 -0.10 0.10 -0.30 0.00 -0.50 Long-run elasticities: Commodity Price: 0.13 GDP: 1.32 88 90 92 94 96 98 00 02 04 06 08 10 12 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) 100 200 300 400 500 600 PROT52 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 -0.10 Page 30 PROT53 Figure 19: RBA Commodity Price (Nominal) 100 125 150 175 25 50 75 RBA Commodity Price Index (Nominal) Average 25 50 75 100 125 150 175 Figure 20: RBA Commodity Price (Real) 4.25 4.5 3.75 4 3.25 3.5 2.75 3 2.5 RBA Commodity Price Index (Real) Average Linear Trendline y = 3E-05x + 2.4145 R, = 0.0709 4.25 4.5 3.25 3.5 3.75 4 2.5 2.75 3 Figure 21: ANZ Commodity Price (Nominal) 110 130 150 PROT54 170 190 210 230 250 90 ANZ Commodity Price Index (Nominal) Average 110 130 150 170 190 210 230 250 90 4 4 Figure 22: ANZ Commodity Price (Real) 4.8 4.6 y = -8E-06x + 4.5974 R, = 0.0225 4.4 ANZ Commodity Price Index (Real) Average 4.8 4.6 4.4 4.2 4.2 Figure 23: BoC Commodity Price (Nominal) 200 400 600 800 1000 0 BoC Commodity Price Index (Nominal) Average 200 PROT55 400 600 800 1000 0 Figure 24: BoC Commodity Price (Real) 6.2 5.2 5.4 5.6 5.8 6 4.8 5 BoC Commodity Price Index (Real) Average 6.2 y = -3E-05x + 6.3235 R2 = 0.1719 86 88 90 92 94 96 98 00 02 04 06 08 10 5.2 5.4 5.6 5.8 6 4.8 5 Page 31 12 PROT56 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 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) 500 1000 1500 2000 PROT57 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 Figure 28: BoC Energy Commodity Price (Real) 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 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 130 180 230 280 330 380 430 480 530 80 PROT58 RBA Commodity Price Index (Nominal) ANZ Commodity Price Index (Nominal) BoC Commodity Price Index (Nominal) Jan 1986 0 130 180 230 280 330 380 430 480 530 80 Figure 30: Ratio of Commodity Price Indices 2.3 Ratio of Australia to NZ Commodity Price Indicies (Nominal) 1.9 1.5 1.2 1.1 0.7 0 7 Ratio of Canada to NZ Commodity Price Indicies (Nominal) 2.2 1.7 Page 32 PROT59 U.S. Trade Balance Monitor Fig 1: The US trade deficit has started a mild recovery -900 -800 -700 -600 -500 -400 -300 -200 -100 0 Jan-92 USD Bn Annualized Trade Balance Annualized Trade Balance,3m Sum Annualized Trade Balance,12m Sum Jan-96 Source: DataStream, Deutsche Bank. Fig 3: The narrowing in the deficit reflected a outpacing of import growth by export growth 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 Source: DataStream, Deutsche Bank Fig 5: Export prices tend to follow the dollar 12 yoy,% -12 -8 -4 0 4 8 Ln u Export Price PROT60 Jan-94 Nov-96 Sep-99 Jul-02 May-05 Mar-08 Jan-11 USTRBROA,inverted (rhs) 4.30 4.40 4.50 4.60 4.70 4.80 -40 -30 -20 -10 0 Jan-00 Jan-04 Jan-08 Jan-12 -900 -800 -700 -600 -500 -400 -300 -200 -100 0 Fig 2: US and world growth recovery has lost momentum 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 Fig 4: Recently export prices have receded sharply while export volumes remain at the same level 10 15 20 PROT61 -20 -15 -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 -15 -10 -5 0 5 Fig 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 Export Volume World IP ex US IP(rhs) 15 yoy,% 5 -5 -15 Page 33 PROT62 Fig 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 Ln 7.1 6.6 6.1 5.6 Fig 8: Export volume deviations from trend strongly 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 Fig 9: A brief end to the dollar upsurge seems to have boosted export volume growth 10 20 PROT63 -20 -10 0 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Fig 11: Import price inflation has followed the dollar 10 15 20 25 -20 -15 -10 -5 0 5 yoy,% -12 -7 -2 3 8 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Import Price USTRBROA,inverted(rhs) 13 yoy,% Export Volume USTRBROA,inverted(rhs) Ln 4.30 4.40 4.50 4.60 4.70 4.80 Fig 10: The recent sharp increase in import price inflation has tapered off during the past few months 10 15 20 -20 -15 -10 -5 0 5 PROT64 Jan-92 yoy,% 12 17 22 Import Volume Import Price (rhs) Jan-96 Jan-00 Fig-12: Import volume growth has generally been highly correlated with US domestic demand growth 10 15 20 -25 -20 -15 -10 -5 0 5 Jan-94 10 yoy,% Import Volume US IP(rhs) Jan-98 Jan-02 Jan-06 Jan-10 -15 -10 -5 0 5 Jan-04 Jan-08 Jan-12 -18 -13 -8 -3 2 7 Page 34 Mar-80 Mar-84 Mar-88 PROT65 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12 Dec-81 Dec-85 Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09 PROT66 Fig 13: U.S. Exports and Imports of Goods and Services (Balance of Payments Basis) (last 13 months) Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oc t Nov Dec 201220122012201220122012 Units 2011201120112012201220122012 Exports Imports (US$ bn.) 177.8 178.6 180.2 184.7 182 5 183.1 185.5 183.3 181.5 187.1 180.6 182.5 186.4 (US$ bn.) 229.5 230.9 224.7 236.4 232 2 230.1 226.5 225.0 224.2 227.5 222.8 231.1 224.9 Trade Balance (US$ bn.) Export & Import Growth Exports Imports Growth Differential -51.7 -52.3 -44.6 -51.7 -49.7 -47.0 -40.9 -41.7 -42.7 -40.4 -42.2 -48.6 -38.5 (y-o-y%) 7.4% 6.3% 8.2% 6.0% 3.9% 4.2% 7.5% 2.8% 1.7% 3.6% 1.0% 3.3% 4.9% (y-o-y%) 11.3% 7.1% 6.3% 7.9% 5.9% 3.0% 1.6% 0.5% 0.5% 1.1% -0.7% 2.5% -2.0% -3.9% -0.8% 1.8% -1.9% -2.0% 1.2% 5.9% 2.3% 1.3% 2.5% 1.8% 0.8% 6.8% Fig 14: U.S. Export and Import Orders (ISM Survey) (last 13 months) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 201220122011201220122013 Units 2010201120122012201220122012 Export Orders Import Orders Exp.-Imp. Orders (index) (index) 52.0 49.0 3.0 53.0 54.0 -1.0 55.0 52.5 2.5 59.5 54.0 5.5 54.0 53.5 0.5 59.0 53.5 5.5 53.5 53.5 0.0 PROT67 47.5 53.5 -6.0 46.5 50.5 -4.0 47.0 49.0 -2.0 48.5 49.5 -1.0 48.0 47.5 0.5 47.0 48.0 -1.0 Fig 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 -3.4 1.5 U.K.-1.8 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 -61.3 PROT68 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 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 -16.6 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 Page 35 PROT69 U.S Exports-Imports by Commodity Fig 16: U.S. Trade Balance Excluding China & Petroleum (Monthly & Annual Balance) Monthly (US$ bn.) (bars) -35 -30 -25 -20 -15 -10 -5 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: DataStream Fig 18: U.S. Trade Balance - Petroleum Products -45 -40 -35 -30 -25 -20 -15 -10 -5 0 Fig 20: U.S. Trade Balance - Capital Goods -4 -2 0 2 4 6 Annual (US$ bn.) (line) 10 20 30 40 50 -30 -20 -10 0 -45 -40 PROT70 -35 -30 -25 -20 -15 -10 -5 0 Monthly (US$ bn.) (bars) -450 -400 -350 -300 -250 -200 -150 -100 -50 0 -500 -450 -400 -350 -300 -250 -200 -150 -100 -50 0 -35 -30 -25 -20 -15 -10 -5 0 Fig 21: U.S. Trade Balance - Industrial Supplies (bars) -400 -350 PROT71 -300 -250 -200 -150 -100 -50 0 -400 -350 -300 -250 -200 -150 -100 -50 0 -12 -10 -8 -6 -4 -2 0 2 4 6 8 Fig 19: U.S. Trade Balance - Consumer Goods Fig 17: U.S. Trade Balance - Advanced Technology (bars) Annual (US$ bn.) (line) 20 40 60 -120 -100 -80 -60 -40 -20 0 Page 36 PROT72 Fig 22: U.S. Trade Balance - Automotive -16 -14 -12 -10 -8 -6 -4 -2 0 -180 -160 -140 -120 -100 -80 -60 -40 -20 0 -2 -1 0 1 2 3 4 Fig 23: U.S. Trade Balance - Food & Beverages 10 15 20 25 30 -15 -10 -5 0 5 Page 37 PROT73 U.S. Bilateral Trade Balances by Country & Region Fig 24: U.S. Trade Balance with China -30 -25 -20 -15 -10 -5 0 Fig 26: U.S. Trade Balance with the Pacific Rim (Asia excluding China and Japan) -9 -8 -7 -6 -5 -4 -3 -2 -1 0 Fig 28: U.S. Trade Balance with Western Europe -14 -12 -10 -8 -6 -4 -2 0 -140 -120 -100 -80 -60 -40 -20 0 -12 -10 -8 -6 PROT74 -4 -2 0 (bars) Annual (US$ bn.) (line) -90 -80 -70 -60 -50 -40 -30 -20 -10 0 -85 -75 -65 -55 -45 -35 -25 -15 -5 -30 -25 -20 -15 -10 -5 0 5 Fig 29: U.S. Trade Balance with Canada (bars) -200 -160 -120 -80 -40 0 (bars) PROT75 Annual (US$ bn.) (line) -300 -250 -200 -150 -100 -50 0 Fig 25: U.S. Trade Balance with Japan -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 Fig 27: U.S. Trade Balance with OPEC (bars) -95 -85 -75 -65 -55 -45 -35 -25 -15 -5 Page 38 PROT76 Fig 30: U.S. Trade Balance with Mexico -8 -7 -6 -5 -4 -3 -2 -1 0 1 10 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 -6 -5 -4 -3 -2 -1 0 1 2 Fig 31: U.S. Trade Balance with Latin America (bars) 10 20 -50 -40 -30 -20 -10 0 U.S Current-Account Balance Monitor Fig 1: U.S. Current-Account Balance PROT77 (1980-2010) Annualized Current Account as % of GDP -7.0 -5.0 -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 Fig 2: U.S. Savings and Investment (Private & Government Sector Savings-Investment) Private Sector Balance 1200 600 -1800 -1200 -600 0 Fig 3: U.S. Current-Account Balance (last 13 quarters) (US$ Billions) Q3 200904 200901 201002 201003 201004 201001 201102 201103 201104 201101 201202 201203 2012 Balance on Goods Balance on Services Bal on Goods & Services Investment Income Unilateral Transfers Bal on Current Account (annualized, as % of GDP) -128.9 -143.3 -152.5 -164 6 -166.9 -161.1 -181.4 -187.2 -180.6 -189.3 -194.3 -185.7 -173.9 31.4 34.8 34.6 37.0 37.7 41.1 44.1 45.6 45.8 43.0 45.9 48.3 49.4 -97.4 -108.5 -118.0 -127.7 -129.1 -120.0 -137.2 -141.5 -134.8 -31.7 -33.2 -31.5 -35.2 -33.8 -31.8 -146.3 -148.4 -137.4 -124.5 34.7 38.1 41.6 47.7 47.8 46.8 52.5 56.2 58.5 59.9 47.4 52.1 50.8 -32.9 -30.3 -34.7 -32.2 -32.7 -95.7 -100.7 -111.0 -111.7 -114 6 -104.7 -120.0 -119.1 -108.2 -32.7 -33.8 -118.7 -133.6 -118.1 -107.5 -2.7% -2.9% -3.1% -3.1% -3.1% -2.8% -3.2% -3.2% -2.9% -3.1% -3.5% -3.0% -2.7% Gov't Sector Balance PROT78 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 39 PROT79 Fig 4: U.S. Current-Account Balance (1998-2010) (US$ Billions) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Balance on Goods Balance on Services Bal on Goods & Services Investment Income Unilateral Transfers Bal on Current Account -336.2 -445.8 -421.3 -474.5 -540.4 -663.5 -780.7 -835.7 -818.9 -830.1 -505.9 -645.9 -738.3 73.0 69.0 59.5 57.1 49.4 58.2 72.1 82.4 122.2 131.8 124.6 145.8 178.3 -263.2 -376.8 -361.8 -417.4 -491.0 -605.4 -708.6 -753.3 -696.7 -698.3 -381.3 -500.0 -560.0 11.9 19.2 29.7 25.2 43.7 65.1 68.6 44.2 101.5 147.1 128.0 165.2 221.1 -50.4 -58.8 -64.6 -65.0 -71.8 -88.2 -105.7 -91.5 -115.1 -125.9 -123.3 -136.1 -134.6 -301.7 -416.3 -396.6 -457.2 -519.1 -628.5 -745.8 -800.6 -710.3 -677.1 -376.6 -470.9 -473.4 (annualized, as % of GDP) -3.2% -4.2% -3.9% -4.3% -4.7% -5.3% -5.9% -6.0% -5.1% -4.7% -2.7% -3.2% -3.1% Fig 5: U.S. Savings-Investment & Net Foreign Investment (1998-2010) (US$ Billions) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Private Savings Private Investment 1380.2 1376.2 1466.5 1656.8 1749.7 1894.6 1925.4 2079.5 1989.3 2282.7 2569.6 2785.4 2860.6 1641.5 1772.2 1661.9 1646.9 1729.7 1968.5 2172.3 2327.1 2295.2 2087.6 1546.8 1795.1 1916.3 Private-Sector Balance -261.3 -396.0 -195.4 9.9 20.0 -73.9 -246.9 -247.6 -305.9 195.1 1022.8 990.3 944.3 Gov't Savings Gov't Investment Gov't-Sector Balance Gross Savings Gross Investment Savings-Investment 327.8 423.9 229.2 -95.9 -197.1 -155.9 -6.5 116.5 58.3 -374.5 -972.2 -964.9 -896 3 287.4 304.3 322.0 343.5 355.8 372.3 392.0 425.1 456.4 497.2 505.4 505.3 483.2 40.4 119.6 -92.8 -439.4 -552.9 -528.2 -398.5 -308.6 -398.1 -871.7 -1477.6 -1470.2 -1379 5 1708.0 1800.2 1695.7 1560.9 1552.6 1738.7 1918.9 2196.0 2047.7 1908.2 1597.3 1820.4 1964.3 1928.8 2076.5 1984.0 1990.4 2085.4 2340.9 2564.3 2752.2 2751.7 2584.7 2052.2 2300.4 2399.5 -220.8 -276.3 -288.3 -429.5 -532.8 -602.2 -645.4 -556.2 -704.0 -676.5 -454.9 -480.0 -435.2 Statistical Discrepancy -71.1 -134.0 -103.3 -22.1 16.6 -22.3 -95.1 -242.3 -12.0 PROT80 -2.4 77.4 0.8 -47.9 Net Foreign Investment -291.9 -410.4 -391.6 -451.6 -516.1 -624.6 -740.5 -798.4 -716.0 -679.0 -377.4 -479.2 -483.1 Page 40 PROT81 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 Source: FRB, Census, BEA, DB Global Markets Research Source: FRB, Census, BEA, DB Global Markets Research 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... Source: COFER, IMF, DB FX Research 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 Source:, COFER, IMF, DB FX Research Page 41 PROT82 Figure 7: The USD share in world reserves fell during 2002-04; then stabilized and has now started falling again Figure 8: Advanced country FX reserve holdings... Source COFER, IMF, DB FX Research 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 Source:, COFER, IMF, DB FX Research Figure 11: The share of euros and dollars is not very different Figure 12: EM holdings of dollars had climbed steadily Page 42 PROT83 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) Source: US TIC data DB FX Research Page 43 PROT84 Appendix 1 Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, 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. Bilal Hafeez Deutsche Bank debt rating key CreditBuy ("C-B"): The total return of the Reference Credit Instrument (bond or CDS) is expected to outperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditHold ("C-H"): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to perform in line with the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditSell ("C-S"): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to underperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditNoRec ("C-NR"): We have not assigned a recommendation to this issuer. Any references to valuation are based on an issuer's credit rating. Reference Credit Instrument ("RCI"): The Reference Credit Instrument for each issuer is selected by the analyst as the most appropriate valuation benchmark (whether bonds or Credit Default Swaps) and is detailed in this report. Recommendations on other credit instruments of an issuer may differ from the recommendation on the Reference Credit Instrument based on an assessment of value relative to the Reference Credit Instrument which might take into account other factors such as differing covenant language, coupon steps, liquidity and maturity. The Reference Credit Instrument is subject to change, at the discretion of the analyst. Page 44 PROT85 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. 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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 mismeasure 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. 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