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U.S dollar is going to depreciate in thenext 24 months
1
Group 4:
Chua Beng Huat
Li Xue Qing (Jo)
Takako
Prateek
Wang Di (Dean)
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Drivers of USD
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Short Term Drivers
Fed Policy
Capital Flows
Longer Term Drivers
Current Account Balances
Budget position
Net FDI flows
US relative trading partner inflation
US Debt sustainability
USD as reserve currency
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The quality of jobs created
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The number of part-time workers in the United States has just hit a new all-time high, but the
number of full-time workers is still nearly 6 mil l io nbelow the old record that was set back in
2007;
Even though the U.S. economy created nearly 200,000 jobs in June, the number of full-time
jobs actually decreased;
The U.S. economy continues to trade good paying jobs for low paying jobs. 60 percent of the
jobs lost during the last recession were mid-wage jobs, but 58 percent of the jobs created
since then have been low wage jobs. 69% of the jobs created in Q2 came from the three
lowest paying sectors, and the majority appear to have been part-time.
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The quality of jobs created
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Student Debt Bubble
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Student Debt crosses $1000000000000
1. The weak U.S. Economy has caused many to pursue education to become employable
but the jobs aren't there and the students are loaded with high student loans which they
cant repay;
2. Even if they were in a position to repay, that will mean they wont be in a position to spend
thus impeding the recovery;
3. As per FICO Labs as a group, individuals taking out student loans today pose a
significantly greater risk of default than those who took out student loans just a few years
ago;
4. The delinquency rate on student loans that originated between 2005-2007 is 12.4 %. Thecomparable figure for student loans that originated between 2010-2012 is 15.1 percent,
representing an increase in the delinquency rate by nearly 22 percent.
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The Student Debt Bubble
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The housing unrecovery
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1. There are some major issues facing the housing recovery in USA;
2. A lot of the demand has been created by PE players who are using the cheap funding to play
on the arbitrage that exists between rental yields and interest they have to pay to the banks;
3. As with any market, the moment the number of players increase arbitrage shrinks making it
less attractive for the pe players;
4. One of the first PE players Carrington has already stopped buying as the rental yields are
now falling and as more stupid money starts flowing in.
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The housing unrecovery
Another major hurdle to the housing recovery is the rising interest rates. The fed talk of tapering
caused the yields to spike like crazy.
The 30 year conventional mortgage rate used for fixing the housing mortgage interest jumpedfrom 3.4% to 4.5%
The impact of hike would be large enough to derail the nascent recovery that just might be taking
place in the
Impact of rate hike on average American
We are assuming a house of $500k and $400k is financed by a 30 year mortgage
Median Salary : $50k
13 October 2013Government of Singapore Investment Corporation Pte Ltd. 8
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The U.S Dollar will depreciate
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Impact of rise in interest rates on average homebuyer
Average home price assumed to be 500k out of which 400k is borrowed. The tenure is30 years.
Interest rate 3.40% 4.50% 5.50%
EMI 2294 2547 2791
Change in EMI 253 244
Annual impact 3036 2928
The median American household income is 50k
So 1% increase in interest rate takes 6% out of the pockets of average
American
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The U.S Dollar will depreciate
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The U.S Dollar will depreciate
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If the housing recovery is real then why are the lumber prices falling?
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Capital flows
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Equity and bond flows
1. The great rotation from bonds to
equities (specifically into developed
market equities) is well underway;
2. US equity has attracted huge inflows ;
3. If US economic data comes out weak
as we have forecasted, the huge
equity flow into US can reverse,
putting downward pressure on USD.
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Current Account Deficits
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US current account deficit is around 4% of GDP
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Fiscal Budget Deficit
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-1,600
-1,400
-1,200
-1,000
-800
-600
-400
-200
0
200
400
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014(F)
Surplus or Deficit as % of GDP (LHS) Surplus or Deficit (In US$ Bil) (RHS)
Historical Budget Balance
Theory: Weak fiscal position weaker currency
Source: Office of Management and Budget
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Long Term Inflation Differentials
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Historical CPI
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
United States Japan Eurozone
Theory: According to PPP, higher relative long term inflation weaker currency
Source: S&P
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US Dollars drop in its power
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55
60
65
70
75
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013 Q1
%
Source: International Monetary Fund, Currency composition of Foreign Exchange Reserves
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USD JPY exchange rate
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New monetary policy under Kuroda
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70
80
90
100
110
120
130
140
0.00%
50.00%
100.00%
150.00%
200.00%
250.00%
300.00%
350.00%
400.00%
2008/01
2008/
05
2008/
09
2009/01
2009/
05
2009/
09
2010/01
2010/
05
2010/
09
2011/01
2011/
05
2011/
09
2012/01
2012/
05
2012/
09
2013/01
2013/
05
2013/
09
2014/01
2014/
05
2014/
09
2015/01
Monetary Base Average AmountsOutstanding(% of GDP)
Japan U.S. USDJPY
Biggest move since QE began in 2001
Purchase 7.5 trillion yen ($78.6 billion) ofbonds /per month
Double the monetary base in two yearsand will grow to 270 trillion yen by theend of 2014
It exceeded consensus of 5.2 trillionyen /per month at April
But can it continue? Can we expectadditional monetary policy? Can weexpect the yen to continue weakenagainst $
The answer is NO
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Further QE is difficult, because high debt
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0
50
100
150
200
250
300
2008 2009 2010 2011 2012f 2013f
General government debt (% of GDP)
Source: General Government Net Debt In 2050 In A Hypothetical No-Policy-Change Scenario, S&P
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JGB Yields
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CORE CPI raise in July 2013 Further QE?
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Weaker yen will cause :
oil and food prices to move up Wages and oil price increase will go up making exportsuncompetitive
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What will be the next BOJ action?
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Expected inf lat ion and long -term interest rates inc rease meanincrease of f inancing cost for huge go vernment debt .
The new import policy has resulted in increased import costs and arise in food and oil prices but has failed to stimulate demand.
Kurodas conviction his April plan to double the nations monetarybase wil l be enough to end def lation is con front ing i ts biggesttest with a sus tained sel l-of f in stoc ks.
So, the pol icy is no t effect ive for Japan econ om y, We canno t
expect fur ther monetary p ol icy.
Appreciate USD against JPY?No
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USD CNY exchange rate
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US Dollars drop in its power
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The internationalization of RMB
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China is acting on its plan for the RMB to become an international reservecurrency. Here's a breakdown of what is happening:
1. Earlier this month, the European Central Bank announced a largecurrency swap arrangement with china;
2. Thechinamoneyreport.com on June 16 reported RMB-yen trade isgrowing strongly a year after launch;
3. BBC News, Feb. 22: UK and China Poised for Currency Swap Deal;
4. BBC News, March 26: China and Brazil Sign $30bn CurrencySwap Arrangement;
5. BBC News, April 9: China and Australia in Currency Pact;
6. Thechinamoneyreport.com on June 4 reports that Singapore haslaunched a Yuan clearing service.
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What about EURO?
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The worst is probably over.
1. Government bond yields havefallen back to pre-crisis low.
2. Portugal successfully returnedto the bond market.
3. Easier access to credit allowsEurope to create growthinstead of focusing onausterity.
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Voice from Germany
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1. Germany will be urged to stimulate itsdomestic demand to help euro zone get back
to growth
2. Merkel: Strong euro is part of her campaignstrategy
3. Target 2 balances : Germany has to ensurethat Euro stays intact to ensure that it receivesits Target 2 balances
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Conclusion
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US Dollar is going to depreciate in the next 24 month.
All these point towards a very weak economy which is trying hard to stay afloatand any shock can sink it into a recession;
The only factor which has kept the U.S economy afloat is the Fedss policy ofzero interest rates and Quantitative easing;
Any FED action to tighten the monetary policy can put the nascent recovery atrisk;
We have also seen major economies trying to diversify the foreign currencyreserves and are less and less inclined to finance US debt. The U.S Fed has nooption but to continue printing fresh money to buy U.S. Debt and prevent USinterest rates from rising.
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Thank you
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