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Foreign Exchange Outlook
Safety, Liquidity & Return …
Chris TurnerHead of Foreign Exchange StrategyLondon +44 20 7767 [email protected]
Tom LevinsonForeign Exchange StrategistLondon +44 20 7767 [email protected]
FX Strategy
March 2012
1March 2012
Key currency attributes in 2012
•
Very few currencies demonstrate all the attributes of safety, liquidity and return
Return
LiquiditySafety
AUD
CAD
GBP
JPY
NOK
CHF
SEK
USD
NZD
EUR
EMEA
ASIA ex CNY
LATAM
CNY
-6 -4 -2 0 2 4 6 8
NOKNZDAUDCHFCADSEKEURGBPJPY
Year-to-date vs. USD (% chg)
2March 2012
Pillar I …
Safety …
•
The known unknowns•
… Debt sustainability•
… EMU break-up risk•
… Oil•
… Elections•
… Dollar performance
3March 2012
EUR/USD …
the known unknowns
IMPACTLow High
High
Low
PR
OB
AB
ILIT
Y
US elections/ protectionism
Early Fed tightening
Fed QE3
Greece leaves EMU
Eurozone
breaks up
Iran Conflict
Eurozone
hard-landing
Chinese hard landing
EUR/USD
Positive factors
Negative factors
0%
15%
30%
4March 2012
Oversized debt baggage in G10
•
Financial sector reliant, indebted G10 transfer debt from private to public sector …•
… with the fiscal metrics of the ‘Big 4’
badly compromised
vs. the rest of the G10•
EZ → 60% Maastricht Criteria a distant memory•
US → 100% threshold fast approaching …
unlikely to turn before 2015•
Deficit start points
key determinant of fiscal scope & downgrade risk
0
20
40
60
80
100
120Ja
pan
US
EU
17 UK
Can
ada
Nor
way
Sw
itz NZ
Sw
eden
Aus
tralia
2007 2011 2015
General government gross debt (% of GDP)
M aastricht Criteria
(188, 233, 250)
5March 2012
Exclusive AAA club –
shrinking …
Germany L’bourgFinlandN’landsFrance(Jan12)
Austria(Jan12)
Ireland(Mar09)
Spain(Jan09)
DenmarkNorwaySwedenSwitz.UK
SingaporeHKAustraliaCanada
Japan(Feb01)
US(Aug11)
‘Big 4’
Asia/$-bloc
Europe
Eurozone
6March 2012
What if EMU broke up? Scenario analysis
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
90 95 00 05 10 150.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
Greek exit
Total break-up
Baseline
EUR/USD - scenario analysis
7March 2012
Eurozone internal imbalances exposed
-15
-10
-5
0
5
10
Gre
ece
Por
tuga
l
Spa
in
Italy
Irela
nd
Fran
ce
Bel
gium
Finl
and
Aus
tria
Net
herla
nds
Ger
man
y
Luxe
mbo
urg
Current Account Balance (% of GDP, 2008-2010 average)Change in C/A Balance 1998-2010 (% of GDP)
Overvalued currencies
Undervalued currencies
8March 2012
… and competitiveness in focus
-20
-15
-10
-5
0
5
10
15
20
Italy
Spa
in
Gre
ece
Bel
gium
Por
tuga
l
Net
herla
nds
Irela
nd
Aus
tria
Fran
ce
Ger
man
y
Finl
and
REER (% Change 1999-2008, using export price deflator)REER (% Change, 1999-2008, using Unit Labour Costs)REER (% Change, 1999-2010, using Unit Labour Cost)
Less competitive
More competitive
9March 2012
A new Greek drachma -
hello and good-bye
FX performance after failed FX regimes
0
20
40
60
80
100
120
1 51 101 151 201 251 301 351 401 451 501
Days after January 1st of crisis year
Jan
1st o
f cris
is y
ear =
100
0
20
40
60
80
100
120Mexico 1994Thailand 1997Indonesia 1997Korea 1997Russia 1998Brazil 1998Turkey 2000
•
Greek exit
and a return of the Drachma is now on the table
•
The implementation challenge huge
•
We can only guess as to how it could be re-introduced ...
•
… but on arrival we would expect it to fall up to 80% vs. EUR
•
… generally at the lower end of performances of failed FX regimes
10March 2012
EMU break-up -
List of shame
•
Rock solid•
Germany •
Almost safe
–
5-10% weakness vs. DEM
•
Netherlands, Austria, Finland, Luxembourg
•
On the edge
–
10-20% weakness vs. DEM•
France, Belgium•
Vulnerable
–
20-30% weakness vs. DEM•
Italy, Ireland•
Casualties
–
50% weakness vs. DEM•
Portugal, Spain •
Worst offender
–
80% weakness vs. DEM•
Greece 0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Jan12 Jan13 Jan14 Jan15 Jan16 Jan170.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Almost Safe (7.5%) On the Edge (15%) Vulnerable (25%)Casualties (50%) Worst Offender (80%)
DEM / break-up FX (T-1 to break-up DEM/Lcl = 1.00)
Aus, Fin, Lux, Neth
Belg, Fra
Ire, Ita
Port, Spa
Greece
11March 2012
EMU break-up -
Some views from corporates Corporates
are treating risks seriously
•
Some treasurers spending one day per week on this
Limiting net exposures
•
Once net exposures have been identified, try to reduce them where possible e.g. more frequent cash sweep
How to hedge
•
Not much interest in proxy hedges, e.g. DKK, assumption that EUR continues in some form, even as a ECU II
Match assets with liabilities
•
This is the purest hedge. Consensus did seem to be heading towards drawing down on lines of local bank credit, in which countries the assets located
Capital controls
•
Illegal under Lisbon treaty… but desperate times call for desperate measures?
12March 2012
Higher oil -
Winners & losers in FX world
Net oil exports as a % of GDP (2009-11 average)
-15
-10
-5
0
5
10
15
Rus
sia
Nor
way
Can
ada
Mex
ico
Braz
ilU
KIn
done
sia
Aust
ralia
Switz
erla
ndR
oman
ia US NZ
Swed
enTu
rkey
Chi
naJa
pan
Hun
gary
Cze
ch R
epSo
uth
Pola
ndIn
dia
Philip
pine
sTh
aila
ndTa
iwan
Ko
rea
Sing
apor
e
Winners Losers
-2
0
2
4
6
8
10
70 75 80 85 90 95 00 05 10-30
-10
10
30
50
70
90
110
130
150
Global growthBrent oil price (right)
(YoY%) (US$/bbl)Brent oil, global growth, US recessions
- US recessions
13March 2012
S Arabia, 9.6
Iran, 3.5
Kuwait, 2.8Iraq, 2.7
UAE, 2.6
Venezuela, 2.4
Nigeria, 2.1
Angola, 1.7
Algeria, 1.2
Libya, 1.0 Qatar, 0.8E'dor, 0.5
OPEC oil supply (bbl per day / Jan 2012)
Middle East risk –
Iran vs. Iraq
•
OPEC represents 1/3 of global oil production•
Oil prices are the highest since 1Q11 …•
… driven by Iran-related concern•
… risk of supply side shock is a concern•
Military conflict would result in a far higher oil price than Iran’s supply suggests•
Although Iraq
is set to increase production 2m/bpd
14March 2012
2012 -
a year of election risk
3
4
5
6
7
8
9
10
11
80 83 86 89 92 95 98 01 04 07 10 133
4
5
6
7
8
9
10
11
Reagan
Bush Sn
Clinton
Clinton
Bush
Bush
Obam a
Reagan-UE rate fell f rom 10.8 to 7.2%
could the same happen in 2012?
Unemployment in US election year
29 April or 6 May …
22 April / 6 May …
6 November …
Date President Senate House 1mth 3mth 6mth 12mth02-Nov-76 Carter (D) D D Yes 0.5 0.6 1.8 5.304-Nov-80 Reagan (R) R D No -2.3 -8.5 -13.3 -17.6 06-Nov-84 Reagan (R) R D No -4.5 -8.9 -6.1 11.808-Nov-88 Bush Sn (R) D D No* 1.7 -4.9 -6.4 -5.5 03-Nov-92 Clinton (D) D D Yes -0.7 -5.1 -0.8 -9.3 05-Nov-96 Clinton (D) R R No* -1.8 -7.1 -10.9 -9.5 07-Nov-00 Bush Jn (R) Hung R No* 3.1 7.8 3.6 4.102-Nov-04 Bush Jn (R) R R Yes 3.9 1.3 0.9 -6.7 04-Nov-08 Obama (D) D D Yes -0.8 0.6 2.9 15.706-Nov-12 ??? D RYes = all 3 same party, No* - S & H aligned, but not President, No = S & H different
EUR/USD %chg after ElectionFull mandate
15March 2012
Safe-haven flows -
USD desire
-60
-40
-20
0
20
40
60
80
100
120
06 07 08 09 10 11 1270
75
80
85
90
95
Net purchases US T-Bills USD Index (rhs)
(US$bn, 3m MA)
Safe-haven US Treasury Bill flows
Inflow
-1.00
-0.50
0.00
0.50
1.00
EUR JPY GBP CHF NOK SEK CAD AUD NZD
2007+ GFC (Aug-Oct08)Greece I (Apr-May10) Greece II (Jul-Sep11)
G10 - VIX correlation
-1.00
-0.75
-0.50
-0.25
0.00
PLN CZK HUF RON RUB TRY ZAR ILS2007+ GFC (Aug-Oct08) Greece I (Apr-May10) Greece II (Jul-Sep11)
EMEA - VIX correlation
•
During crisis US asset demand surges
•
Correlation between equity market volatility and FX increases
•
Although signs of Greece-related fatigue
-1.00
-0.50
0.00
0.50C
NY
INR
IDR
KR
W
MY
R
PH
P
SG
D
TWD
THB
BR
L
MX
N
2007+ GFC (Aug-Oct08)Greece I (Apr-May10) Greece II (Jul-Sep11)
Asia & Latam - VIX correlation
16March 2012
USD -
Crisis is the dollar’s only friend
•
Crisis would seem to be the US dollar’s only friend•
It is simple but we see value in looking at the USD Index (DXY) 200 day moving average•
Breaches signal crisis and saw DXY rally 25% during the 2H08 GFC
& 20% during the 1H10 Greek crisis …•
… DXY broke through the 200 day m.a. in September 2011
70
80
90
100
110
120
02 03 04 05 06 07 08 09 10 11 1270
80
90
100
110
120USD Index 200 day m.a.
Global Financial Cris is (GFC)
Greek Debt Cris is (s tart) (GDC)
Hom eland Inves tm ent Act (HIA)
DXY 200 day MA
17March 2012
Safety …
Vulnerable
Safe
Return
LiquiditySafety
AUDSEKNZD
CAD NOK EUR GBP CHF JPY USD
18March 2012
Pillar II …
Liquidity …
•
Market characteristics
…
•
… DM vs. EM trade off
•
… Latest volume surveys
•
… FX reserve managers as a guide
•
… Too much liquidity is a ‘problem’
19March 2012
The old rules still apply …
•
In times of crisis the ‘old rules still apply’
…
•
… Emerging mkt
volatility spikes far more than Developed mkt
•
In calmer times increasingly liquid EM trades are similar to DM …
•
In 2011 EM volatility even traded below DM for a period
•
This highlights that much of the world’s woes are concentrated in the EU17, US & Japan
5
10
15
20
25
30
35
08 09 10 11 125
10
15
20
25
30
35
G7 FX volEM FX vol
(%)FX volatlity (implied)
20March 2012
Global safe havens –
surpluses help
Current accounts in G20 in 2012 (% of GDP)
-10
-5
0
5
10
15
S Ar
abia
Nor
way
Switz
erla
nd
Chi
na
Swed
en
Ger
man
y
Rus
sia
Japa
n
Kore
a
EU17
Indo
nesi
a
Mex
ico
Arge
ntin
a
US
Indi
a
UK
Fran
ce
Braz
il
Italy
S Af
rica
Can
ada
Aust
ralia NZ
Turk
ey
IMF forecasts
•
A current account deficit
means a country is a net borrower and
relies on inward foreign investment in the form of either of FDI or portfolio investment
21March 2012
AUD volumes are surging …
0
50
100
150
200
EUR
/USD
AUD
/USD
GBP
/USD
USD
/JPY
USD
/CAD
EUR
/JPY
USD
/CH
F
EUR
/GBP
EUR
/CH
F
USD
/MXN
USD
/TR
Y
NZD
/USD
USD
/SG
D
USD
/RU
B
USD
/ZAR
EUR
/SEK
EUR
/NO
K
USD
/BR
L
USD
/SEK
EUR
/PLN
EUR
/AU
D
USD
/NO
K
EUR
/CAD
USD
/CN
Y
USD
/KR
W
USD
/INR
Oth
ers
FX 'spot' daily turnover (US$bn) - October 2011590
•
EUR/USD and the G10 still dominate global FX trading
•
Latest turnover surveys show AUD/USD activity surging …
•
… taking it ahead of GBP/USD and USD/JPY
•
Greater FX flexibility would help emerging market volume to increase
22March 2012
0
20
40
60
80
100FX Liquidity
LT Debt Rating
JPY
EUR
USD
GBP
AAAAA+AAAA-A+
Developed Markets … Big 4
G3
0
20
40
60
80
100FX Liquidity
LT Debt Rating
FranceBelgium
Italy SpainGerm any
Neth.
Finland
AAAAA+AAAA-A+
Eurozone breakdown
0
2
4
6
8FX Liquidity
LT Debt Rating
HKD
AUD
CHF
CAD
SEK
RUB
BRL MXN
KRW
DKK
NZD SGDZARTRY
PLN
AAAAA+AAAA-A+AA-BBBBBBBBB-BB+BB
INRNOK
… and all the rest
S3
Size of bubbles represents debt market liquidity
Where do FX reserve managers place funds?
23March 2012
Too much liquidity can start to hit FX
Central Bank asset purchases (% of GDP)
0
2
4
6
8
10
12
14
16
18
20
22
24
Bank ofEngland
FederalReserve
Bank ofJapan
ECB
LTRO 1 & 2
QE still to come
•
The Fed & BoE undertook large scale QE in early 2009 …
•
… and the BoE continues to do so
•
While the primary monetary objective was to address fears of deflation …
•
… the by-product was large scale currency weakness
•
Is the ECB undertaking QE?
•
If ECB created money is used to buy sovereign debt –
even for a three year period –
then the answer is yes
•
And even Japan has turned more aggressive this year …
•
… adopting a 1% inflation target and increasing its own QE
24March 2012
ECB catch-up with Fed to weigh on EUR/USD
•
For a change, EU17 base money has been growing faster than the US …•
… Fed balance sheet has been flat since mid-2011 while ECB’s
is up 40%•
Greater base money expansion should ultimately prove a EUR negative•
Look for overnight Eurozone
rates to drift to the 0.25% floor
EUR/USD vs. overnight rate spreads
1.20
1.25
1.30
1.35
1.40
1.45
1.50
Jan-10 Jul-10 Jan-11 Jul-11 Jan-120
20
40
60
80
100
120
140
EUR/USD EONIA :Fed Funds spread (RHS bp, 10 day m.a.)
50
100
150
200
250
300
08 09 10 11 121.20
1.30
1.40
1.50
1.60
US:Eurozone monetary base ratio EUR/USD (right)
EUR/USD vs. monetary base ratio
25March 2012
Liquidity
Illiquid
Liquid
Return
LiquiditySafety
GBP JPY EUR USDAUDCADNZD NOK SEK CHF
26March 2012
Pillar III …
Return …
•
Identifying the investment environment
…
•
… Carry trade
•
… Policy mix in DM vs. EM space
•
… Identifying the returns
•
… Prospect for equity inflows
•
… Two versions of fair value
27March 2012
How are we feeling today?
ReturnSafety/Liquidity
2012?
2005-2007
2008, 2011
28March 2012
Framework for 2012
Spain
Portugal
Italy
Greece
Germany
France
US
UK
SwitzerlandSweden
SARussia
Norway
NZ
Japan
India
China
CanadaBrazil
Australia
EU17
-10
-8
-6
-4
-2
0
2
0 20 40 60 80 100 120
General government gross debt (% GDP)
General deficit (% GDP)
240%
121%
189%
11.2%
Debt & Deficit Dynamics (2012)
•
In terms of interest rates the developed market offers very little …
•
… but where there is yield it is away from the QE/zero rate dependent Big 4
•
The Big 4
of the US, Japan, EU17 & UK have unfavourable debt/deficit dynamics
•
The BRIC nations look good …•
… as do Sweden, Norway & the $-bloc
Australia
Brazil
Canada
China
India
Japan
NZ
Norway
Russia
SA
Sweden
Switzerland UKUS
France
Germany
Greece ItalyPortugal
Spain
0
2
4
6
8
10
-4 -2 0 2 4 6 8 10
GDP gowth (%)
Interest Rate (%)
Growth & Interest Rates (2012)
EU17
29March 2012
G10 composite leading indicatorsG10 OECD Composite Leading Indicators
80
85
90
95
100
105
110
07 08 09 10 1180
85
90
95
100
105
110
Canada Eurozone
France Germany
Japan Sweden
UK US
Switzerland
(Jan08=100)
30March 2012
US rates at 0% until 2014 –
if you believe Fed
•
Fed pledge to maintain current interest rates until at late 2014
is no guarantee•
… the FOMC most divided since 1992
(3 dissenters on 9 Aug)
•
If/when the Fed signals an end to zero interest rates Treasury yields will move sharply higher …•
… probably triggering strong USD appreciation
USD TWI Majors versus 2 year yield spread
67
70
73
76
79
82
85
88
Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
USD TWI Majors US:Major trading partners two year yield spread
(%)
rising US yield spead & USD
falling US yield spread & USD
31March 2012
Carry trade will be popular
0
200
400
600
800
1000
1200
1400
1600
1800
90 92 94 96 98 00 02 04 06 08 10 1280
100
120
140
160
180
200
220
S&P500
Carry Trade (rhs, Jan1990=100)
(Long AUD, NZD, NOK vs.Short USD, JPY, CHF)
S&P500 vs. Carry Trade
•
Carry trade strategies are high return and high risk
…•
… 50% of gains between 2002-09 were wiped out in a matter of weeks
32March 2012
Return -
yields point to Australia …
Nominal and risk-adjusted yields in G10 space
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
AUD NZD NOK SEK CAD GBP EUR USD JPY CHF0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
3 month rates Risk-adjusted yields
•
If the risk environment does allow investors to chase yield
…
•
… Australia could attract the lion’s share of the flows
•
Both in terms of nominal yields and yields adjusted by expected volatility AUD stands out
•
Closer to home and in a European world of low returns, NOK & SEK are our high yielders
33March 2012
BRIC+EM Composite leading indicators
BRIC +EM Composite Leading Indicators
80
90
100
110
120
130
140
150
160
170
07 08 09 10 1180
90
100
110
120
130
140
150
160
170India Czech Rep.
Hungary Poland
Russia Turkey
Brazil China
(Jan08=100)
34March 2012
Select EM destinations for the carry tradeNominal and risk adjusted yields: EMEA
0123456789
10
UAH TRY ZAR RUB HUF PLN RON KZT CZK0
0.2
0.4
0.6
0.8
1
1.2
3 month implied yields Risk-adjusted yields
Nominal and risk adjusted yields: Latam
0123456789
10
BRL COP CLP MXN PEN0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
3 month implied yields Risk-adjusted yields
Nominal and risk adjusted yields: Asia
-2
-1
0
1
2
3
4
5
6
IDR KRW THB PHP SGD CNY TWD-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
3 month implied yields Risk-adjusted yields
35March 2012
EM market sizing -
Big is beautiful
Size of EM local debt markets (US$ bn)
0
400
800
1200
1600
Braz
il
Mex
ico
Pola
nd
Turk
ey
Rus
sia
Col
ombi
a
S. A
frica
Cze
chR
ep.
Hun
gary
Rom
ania
CHINA17%
BRAZIL15%
KOREA15%
SOUTH AFRICA8%
INDIA7%
RUSSIA7%
TAIWAN11%
Other3%
TURKEY1%
MEXICO5%
MALAYSIA3%
THAILAND2%
INDONESIA3%
POLAND1%
CHILE2% MSCI EM
Weightings
36March 2012
Equity flows to return to Asia?
-10
-
10
20
30
40
07 08 09 10 11 12-10
-
10
20
30
40
EMEALATAMASIA
Cumulative equity flows since 2007 (US$bn)
•
Higher growth rates in Asia have typically attracted the lion’s share of global emerging market equity portfolio flows …•
… but not in 2011
-15
-10
-5
0
5
10
15
06 07 08 09 10 11 12
-2
0
2
4
6
8
10Net inflow into EM Asia equity fundsChina CPI (rhs, inverted)
(3m sum / $bn)
(YoY%)Equity inflows to return on lower CPI
•
Typically higher inflation
in China (and presumably the rest of Asia) has discouraged equity inflows
•
A decline in China CPI to 3.5%
this year and looser PBOC policy should help
37March 2012
US equity strength = USD strength
Foreign purchases of US equities vs. USD Index
-100
-50
0
50
100
150
200
Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-1165
75
85
95
105
115
125
Total Foreign Purchases of US Equities (US$bn, 12m sum) USD Index
38March 2012
Global FX -
pain thresholds vary
Currency pain thresholds
-15 -10 -5 0 5 10 15 20 25 30 35
UKMexico
South KoreaUS
EurozoneHungary
South AfricaNorwaySweden
IndiaTurkey
MalaysiaThailand
NZJapan
CanadaIndonesia
SwitzerlandSingapore
ChinaRussia
AustraliaBrazil
Percent of REER index above/below 10-year average
•
With the exception of JPY, the ‘Big 4’
of USD, EUR & GBP are weak
39March 2012
Purchasing Power -
What’s cheap
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
Mex
ico
Pol
and
Bul
garia
Hun
gary
Chi
na
Ukr
aine
Rom
ania
Indi
a
Sou
th A
frica
Cze
ch R
ep
Rus
sia
Slo
vaki
a
Phi
lippi
nes
Indo
nesi
a
Kaz
akhs
tan
Bra
zil
Turk
ey
Sin
gapo
re
Arg
entin
a
Sou
th K
orea
Spa
in US
UK
Hon
g K
ong
Bas
kets
pur
chas
ed p
er €
100
Mar-11 End-11
Cheap
Expensive
High per capita income
EM average
•
EM currency valuations are converging with those in the developed world
40March 2012
Return
QE Return
Return
LiquiditySafety
CHF JPY USD EUR GBP CAD SEK NOK NZD AUD
41March 2012
Appendix
42March 2012
G10 FX & rates
G10 policy rates (%)
0
1
2
3
4
5
6
7
8
9
08 09 10 11 12 13 14
%
0
1
2
3
4
5
6
7
8
9%
EUR GBP USD CHF SEK AUD NZDJPY NOK CAD
Forecast line
60
80
100
120
140
160
08 09 10 11 1260
80
100
120
140
160USD JPY GBPCHF NOK SEKCAD AUD NZD
G10/USD (Jan08 = 100)
•
Safety, liquidity, return all important since 2008 crisis …•
… hence varied characteristics
of top performers over last 5 years•
But whatever way we slice it …
GBP is the worst performer
…•
… constantly misfires and too many false dawns
43March 2012
Central Europe –
FX & interest rates
60
70
80
90
100
110
120
130
08 09 10 11 1260
70
80
90
100
110
120
130
CZK HUF PLN RON RUB TRY ZAR
CEE/EUR (Jan08 = 100)
Stronger CEE FX
CEE policy rates (%)
0
2
4
6
8
10
12
14
08 09 10 11 120
2
4
6
8
10
12
14
CZK HUF PLN RON RUB TRY ZAR
•
Since 2008 the very low yielding CZK has been the top EMEA performer
44March 2012
EMEA -
most vulnerable?
Czech Rep.
Turkey
Russia Poland
Kazakh.
Romania
UkraineBulgaria
Hungary
Latvia
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 20% 40% 60% 80% 100%Private Sector FX loans/ Total loans (end-08)
Exp
orts
/GD
P (2
010)
Most Vulnerable
Vulnerability reflects Trade openness and FX borrowing •
In EMEA, the most open economies are suffering from the Eurozone
slow down …
•
… although so far it is mild in Germany
(which accounts for up to 1/3 exports from Czech Rep, Hungary and Poland)
•
Those countries that have more foreign bank and FX loan exposure
may suffer a continued draw down of loan books.
•
Russia & Turkey
are relatively insulated
45March 2012
CEE …
the known unknowns
IMPACTLow High
High
Low
PR
OB
AB
ILIT
Y
HUFIMF deal fails
CEE
Negative factors
0%
15%
30%
TRYPM leans on CBT
RUBInvestor flight
PLN
Pension fund assets grab
RONDeposit run on Greece
BGN
Deposit run on Greece
CZK
Bank asset
sell-off by owners
30%
15%
0%
UAHNo IMF deal after
elections
46March 2012
Latam
–
FX & interest rates
70
80
90
100
110
120
08 09 10 11 1270
80
90
100
110
120
MXN CLP COP BRL ARS
LATAM/USD (Jan08 =100)
Stronger LATAM
Latam policy rates (%)
0
2
4
6
8
10
12
14
08 09 10 11 120
2
4
6
8
10
12
14
MXN CLP COP BRL
•
Ongoing attempts to prevent BRL appreciation leaves USD/BRL little altered since 2008
47March 2012
Asia –
FX & interest rates
60
70
80
90
100
110
120
08 09 10 11 120
20
40
60
80
100
120
CNY HKD INRIDR KRW MYRPHP SGD TWDTHB
ASIA/USD (Jan08 =100)
Stronger ASIA FX
Asia Policy Rates (%)
0
1
2
3
4
5
6
7
8
9
10
08 09 10 11 120
1
2
3
4
5
6
7
8
9
10
HKD IDR KRW MYR TWDTHB PHP CNY INR
•
In Asia the high yielding INR is also the worst performer
48March 2012
Greece …
planned debt burden reduction New debt restructuring deal•Further haircuts to private sector Greek bondholders who hold €206bn in Greek debt.•Bondholders to receive new debt with lower interest rates of 2% for 2012-15, 3% for 2016-21 and 4.3% thereafter. An approximate NPV loss of 75% for investors
€130bn rescue plan•Official lenders agree to increase their debt burden to get Greek levels to 120.5% of GDP by 2020.•Interest rates lowered on bail-out loans to Greece. This will cut €1.4bn from the bail-out package•€23bn will be contributed from the IMF. Greek debt levels will be lowered by 2.8% of in 2020
ECB/ Central Bank•ECB to redistribute profits on its €40bn of Greek debt to national central banks•Central banks that hold €12bn in Greek bonds will contribute all debt interest to Greece until 2020.•This will cut €1.8bn from the bail-out package•.Greek debt levels will be lowered by 1.8% in 2020. Source: FT
49March 2012
Can
a voluntary
haircut
work for Greece?
Euro bailout15%
other loans5%
ECB16%
Greek banks14%
Europ banks11%
Greek social insurance
9%
Europ insurances
4%
others20%
IM F6%
Total Greek debt: 352bn euro
Europ insurances
7%
others34%
Europ banks20%
Greek social insurance
15%
Greek banks24%
Greek debt held by private sector: 205bn euroTotal Greek debt (€352bn) Greek debt held by private sector (€205bn)
50March 2012
Liquidity fuelled optimism …
-150
-120
-90
-60
-30
0
30
08 09 10 11 12-5
-4
-3
-2
-1
0
1
1Y EUR/USD basis swap1Y risk reversal (rhs)
(bp) (%)EUR/USD CC basis swap & risk reversal
0
400
800
1200
1600
08 09 10 11 120
400
800
1200
1600
Ireland
Portugal
Spain
Italy
(bp) (bp)10Y spread over bunds
0
200
400
600
800
08 09 10 11 120
200
400
600
800
USEurope
BBB corporates spreads
0
1
2
3
4
5
6
08 09 10 11 120
1
2
3
4
5
6
ECB policy rate3mth EURIBOR
(%) Euribor back below ECB rates
51March 2012
Oil -
Will Iran derail the recovery?
Morocco
Algeria1.2m/bpd
Libya1.0m/bpd
Tunisia
Egypt0.8m/bpd
Saudi Arabia9.6m/bpd
Iraq2.7m/bpd
Oman0.8m/bpd
Yemen0.3m/bpd
Syria
Lebanon
Israel
Turkey
Iran3.5m/bpd
Jordan
MauritaniaMali
Niger Chad Sudan
Qatar0.9m/bpd
Eritrea
Afghanistan
Pakistan
Turkmenistan
Kuwait2.8m/bpd
Nigeria2.1m/bpd
UAE2.6m/bpd
Bahrain
Orange countries are OPEC members
52March 2012
Fed -
Rate hikes deferred to 2014
-0.3-0.2-0.10.00.10.20.30.40.50.60.7
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13-2
-1
0
1
2
3
4
5
MoM%YoY%, (rhs)
F'casts
US CPI - MoM% vs. YoY%
•
However, the Fed’s inflation-fighting credentials look safe for 1H2012.
•
Base effects from last year’s energy surge look set to drag headline CPI below 2% this summer.
•
The Fed’s position may be tougher to hold if inflation picks up towards year-end.
•
The Fed has is now releasing individual member interest rate projections …
•
… added transparency probably forced the ‘exceptionally low’
rates pledge to be moved from ‘mid-2013’
to ‘late 2014’
•
This looks merely like an exercise in expectations management.
0
1
2
3
4
5
2012 2013 2014 Longer run
Fed member assessment for appropriate interest rate
(%)
53March 2012
GBP retains safe-haven appeal
0
1
2
3
4
5
6
10 11 120
1
2
3
4
5
6
Sw No GeNe Fi UKSz Ca Au
AAA - 10Y safe-haven yields (% )
•
In an ever decreasing AAA sovereign world GBP is attractive …•
… especially when liquidity/safety takes precedent over return•
Foreign investors have shifted European demand from EU17 to UK
0
200
400
600
800
1000
1200
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Non-BoE domestic
BoE
Overseas
(£bn)
Foreign ownership of gilts rising
54March 2012
EUR/CHF ... top 5 risks for 2012
IMPACTLow High
High
Low
PR
OB
AB
ILIT
Y
EUR/CHF
Positive factors
Negative factors
Severe deflation & SNB raises floor
Government curtails SNB powers
Swiss housing bubble bursts
Hungarian default/debt crisis
Collapse in Swiss exports
Eurozone
breaks up
Greece leaves EMU
Iran Conflict
0%
10%
20%
55March 2012
MONTHLY ECONOMIC FORECAST UPDATES
Global research capabilities
Co-published with our Developed and Emerging Markets team, provides daily analysis of upcoming economic releases and recent data.
Prophet
–
OUR GLOBAL DAILY
Economic Calendar
Published each week, the calendar tells you what’s due when and what we expect.
Each month we update our main forecasts on the major economies of the US, Eurozone, UK, Japan and China in our Monthly Forecast Update.
This serves as a base to update forecasts on the other markets we cover, which is published shortly after in ING Economic Forecasts.
Our analysts around the world produce group research reports that brief on global developments
56March 2012
Developed Markets Economics and Strategy
Other ad hoc reports, weeklies, and dailies provide more in-depth analysis on specific markets.
Our weekly discusses recent themes and market movements in Developed Markets.
Financial Markets Outlook
Tradewise
This weekly flagship publication analyses credit trends in conjunction with economic data releases, and is tailored towards the implications for local fixed-
income markets.
These quarterlies take an in-depth look at the US, Eurozone
and UK economies with a themed introduction, substantial chart pack section, and detailed forecasts.
Quarterly Economic Updates
Our US Economics Team headed by Rob Carnell has been ranked by Bloomberg as the most accurate forecasters of US GDP for 2006/7 and 2007/8 and in 2008/9 came in second.
57March 2012
Emerging Markets Economics and Strategy
A complement of emerging markets economists rounds out our global vision.
Encompasses ING forecasts for all Emerging European markets under our coverage, with updates on the situation in each country
Emerging Europe Quarterly Outlook
The EMBR includes our recent views on the many emerging markets we cover, with recommendations for FX, money markets, Sovereigns and Corporates.
EMBR
–
OUR EM BIWEEKLY
Covering Russia, Ukraine, Kazakhstan, Turkey, Hungary, Poland, Czech Republic, Slovakia, Bulgaria, Romania, Croatia…
ING economists and analysts are positioned around the globe, in London and in major emerging markets, and other smaller markets where ING has a local presence.
EM Debt Strategy provides trade ideas and outlines global debt market trends with recommendations and ING-developed models.
Rated No.1 Firm in the high profile Thomson Extel survey of equity investors in
the EMEA Economics and Macro category for 2010.
58March 2012
FX Strategy Research
FX talkING
Our monthly update on FX trades and trends with recommendations on developed and emerging currencies.
Our FX Strategy team is based in London
Daily FX Strategy
Our daily report on FX moves and developments with a special spotlight on a currency or topic each day.
FX views published in conjunction with our local economists provide strategies and trades in a global and local context
FX research is tailored to ING’s base of corporate and institutional customers
ING FX Strategy placed 3rd in the 2010 Reuters Accuracy Poll for
foreign exchange forecasting.
ING FX Strategy placed at the top for many currency pairs in Bloomberg’s 2009 rankings: 1st for EUR/GBP, 4th for EUR/USD, 3rd for GBP/USD
Year-to-date ING's
foreign exchange strategists are ranked by Reuters in the Top 5 for FX accuracy
59March 2012
Regular Research
Dailies: ProphetMarket snaps/reactionsDaily FX StrategyTechnical Trend MonitorCredit Morning NotesRates StrategyGood Morning AsiaEM Debt Closing PricesRomania Daily SnapshotUkraine Market Snapshot
Weeklies: Financial Markets OutlookGlobal Economic CalendarTradewiseEM debt fund flowsEmerging Markets Biweekly ReportIncluded in the EMBR but also published separately --
Local currency and debt products strategy --
External debt strategy
EMBR Quantitative SupplementEMEA Weekly OutlookSlovakia Local FocusTurkey Local FocusTalking Korea
Monthlies:Global Monthly Economic UpdateING Global Economic ForecastsFX talkINGEuropean Debt Supply UpdateFed PreviewECB PreviewBulgaria MonthlyUkraine Monthly
Quarterlies and Other:Directional Economics/CEE Forecast UpdateFX Top TradesForeign Exchange FocusFX FlashUS Economics Quarterly UpdateEurozone Economics Quarterly UpdateSwiss Economics QuarterlyUK Economics Quarterly UpdatePortfolio StrategyEmerging Europe Quarterly OutlookRomania Local FocusGlobal Presentations
60March 2012
Disclaimer
Certain of the statements contained in this release are statements of future expectations and other forward-looking statements. These expectations are based on management’s current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, among other things, (i) general economic conditions, in particular economic conditions in ING’s core markets, (ii) changes in the availability of, and costs associated with, sources of liquidity such as interbank funding, as well as conditions in the credit markets generally, including changes in borrower and counterparty creditworthiness, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) interest rate levels, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations, and (x) changes in the policies of governments and/or regulatory authorities. ING assumes no obligation to update any forward-looking information contained in this document.This presentation is intended for general information purposes. It does provide basic information concerning individual Commercial Banking products, insurance products or related services. However none of the information should be interpreted as an offer to sell securities or as investment advice of any kind. Queries concerning these topics should be addressed to the individual business units and/or companies of ING Groep N.V. ("ING Group"). No warranty or representation, express or implied, is given as to the accuracy or completeness of that information. In no event will ING Group, nor any of its directors, employees or advisors accept any liability with regard to the information contained in the individual ING companies', business unit or product group's presentation.
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