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Deutsche BankPrivate Wealth Management           FX Outlook           Marshall Gittler           Chief Strategist, EMEA   ...
Currency Outlook: Our forecasts vs mkt, GMWe are somewhat more bullish on USD/bearish on EUR short-term                   ...
Currency outlook: USD PPPUSD PPP valuation is not excessive either wayUSD is within the normal range of valuation vs major...
Currency outlook: USD CycleUSD cycle is largely on trackSource:   Bloomberg Finance LP, DB Global Investment SolutionsDeut...
Currency outlook: EUR/USD We look for some EUR weakness in the near term Market is already discounting a successful conclu...
Currency outlook: EUR/USD We look for some EUR weakness in the coming three months Stocks are also discounting a successfu...
Currency outlook: EUR/USDUSD could get a boost from change in Fed expectationsMarket assumption that Fed lags behind ECB c...
Currency outlook: EUR/USD On the other hand…Stronger US growth isn’t always good for USD                                  ...
Currency outlook: GBPMuch depends on tightening expectations Market looking for UK rate hikes, but weak growth may delay t...
Currency outlook: GBP UK budget deficit may also be a drag on the currency— While the government has pledged to reduce the...
Currency outlook: JPYWe look for a modestly weaker JPY Rate differential isn’t enough to look for a much weaker JPY now— T...
Currency outlook: JPYWe look for a modestly weaker JPYBut the picture should change in 2H— We expect though that eventuall...
Currency outlook: JPY We look for a modestly weaker JPY  Weaker Japanese economy may cause upward pressure on USD/JPY— We ...
Currency outlook: JPYWe look for a modestly weaker JPY Falling C/A surplus may also put pressure on the currency          ...
Currency outlook: CHF We look for a modestly weaker CHF SNB intervention kept CHF from strengthening vs EUR               ...
Currency outlook: CHF   We look for a modestly weaker CHF   CHF already overvalued vs USD                                 ...
Currency outlook: Commodity currenciesCommodity currencies are moving more with rates than commodities— Two major factors ...
Currency outlook: Commodity currenciesWe expect CAD to outperform AUD— AUD tends to follow economic activity in China. We ...
Currency outlook: EMEM countries are adjusting via inflation, not FX revaluation— EM countries are resisting FX appreciati...
Currency outlook: DB Currency IndicesWe expect carry to continue to perform                                               ...
Important notes"Investments are subject to investment risk, including market fluctuations, regulatory change, possible del...
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Currencies 0211

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My presentation to DB\'s Global Investment Committee on the outlook for the FX market

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Transcript of "Currencies 0211"

  1. 1. Deutsche BankPrivate Wealth Management FX Outlook Marshall Gittler Chief Strategist, EMEA Place des Bergues 3 CH-1211 Geneve 1 Switzerland marshall.gittler@db.com +41 (0) 22 739 0463 February, 2011
  2. 2. Currency Outlook: Our forecasts vs mkt, GMWe are somewhat more bullish on USD/bearish on EUR short-term GM is more bullish JPY, less bullish EURMostly in line with market on majors long-termSource: Bloomberg Finance L.P.Deutsche Bank Marshall Gittler, Chief Strategist EMEAPrivate Wealth Management FX Outlook, Feb. 2011 2 005959.01/07/11
  3. 3. Currency outlook: USD PPPUSD PPP valuation is not excessive either wayUSD is within the normal range of valuation vs majors— USD is somewhat undervalued vis-a-vis EUR and JPY and fairly valued vis-a-vis GBP. The undervaluation is not at the level that would usually trigger a counter move.Source: Bloomberg Finance LP, DB Global Investment SolutionsDeutsche Bank Marshall Gittler, Chief Strategist EMEAPrivate Wealth Management FX Outlook, Feb. 2011 3 005959.01/07/11
  4. 4. Currency outlook: USD CycleUSD cycle is largely on trackSource: Bloomberg Finance LP, DB Global Investment SolutionsDeutsche Bank Marshall Gittler, Chief Strategist EMEAPrivate Wealth Management FX Outlook, Feb. 2011 4 005959.01/07/11
  5. 5. Currency outlook: EUR/USD We look for some EUR weakness in the near term Market is already discounting a successful conclusion to Eurozone talks— The market is already discounting a successful conclusion to the Eurozone debt problem, as shown by the fact that the EUR/USD basis swap curve is nearly back to where it was before the debt crisis began. Hence we cannot expect much further positive impetus from that corner.— On the contrary, the risks are that some hiccups occur in the process. The Irish elections for example or a failed auction could knock confidence.— Meanwhile, the improvement in the basis – and in the Eurozone CDS – may have stalled. This could presage further EUR weakness.Source: Bloomberg Finance LP Deutsche Bank Marshall Gittler, Chief Strategist EMEA Private Wealth Management FX Outlook, Feb. 2011 5 005959.01/07/11
  6. 6. Currency outlook: EUR/USD We look for some EUR weakness in the coming three months Stocks are also discounting a successful conclusion — We can see the same in the equity market, where the largest gainers in Europe this year have been the peripheral countries.Source: Bloomberg Finance LP Deutsche Bank Marshall Gittler, Chief Strategist EMEA Private Wealth Management FX Outlook, Feb. 2011 6 005959.01/07/11
  7. 7. Currency outlook: EUR/USDUSD could get a boost from change in Fed expectationsMarket assumption that Fed lags behind ECB could be tested 13m to 1st rate hike 15m so far… 6m to 1st rate hike 11m to 1st rate hike— The market is assuming that the ECB is likely to raise rates sooner than the Fed (an assumption that we would agree with).— Nonetheless, we would think it more likely that market brings forward its assumptions for the likely time of Fed rate hikes than for ECB rate hikes. This is particularly the case if our forecast for a 7.8% US unemployment rate at the end of this year is realized.Source: Bloomberg Finance LPDeutsche Bank Marshall Gittler, Chief Strategist EMEAPrivate Wealth Management FX Outlook, Feb. 2011 7 005959.01/07/11
  8. 8. Currency outlook: EUR/USD On the other hand…Stronger US growth isn’t always good for USD — People often think of a currency rate as the “stock price” of a country and assume that a country with relatively stronger growth will have a relatively stronger currency. — However the history of EUR/USD shows that generally, when US growth has exceeded that of Eurozone growth, the euro has tended to strengthen against the dollar. This may be because a strong US economy tends to suck in imports and hence the current account deficit widens.Source: Bloomberg Finance LP Deutsche Bank Marshall Gittler, Chief Strategist EMEA Private Wealth Management FX Outlook, Feb. 2011 8 005959.01/07/11
  9. 9. Currency outlook: GBPMuch depends on tightening expectations Market looking for UK rate hikes, but weak growth may delay them— Inflation in the UK is rising, as are inflationary expectations. As a result, the market is now fully pricing in a rate hike by June.— However, we believe that the market is getting ahead of itself. On the contrary, we have moved back our forecast for the first rate hike to August, due to weak growth and dovish comments by BoE Gov. King.— We believe there could be some disappointment in the market and GBP could come under pressure again as a result. Source: Bloomberg Finance LP Deutsche Bank Marshall Gittler, Chief Strategist EMEA Private Wealth Management FX Outlook, Feb. 2011 9 005959.01/07/11
  10. 10. Currency outlook: GBP UK budget deficit may also be a drag on the currency— While the government has pledged to reduce the budget deficit, so far it has continued to creep higher as a % of GDP. This means the government will have to cut spending further, which would put pressure on the BoE to refrain from hiking rates even longer. Source: Bloomberg Finance LP Deutsche Bank Marshall Gittler, Chief Strategist EMEA Private Wealth Management FX Outlook, Feb. 2011 10 005959.01/07/11
  11. 11. Currency outlook: JPYWe look for a modestly weaker JPY Rate differential isn’t enough to look for a much weaker JPY now— The rate differential between JPY and USD is current not enough to expect a major move out of JPY assets and into USD assets.— Historically, USD/JPY has tended to decline (i.e., the yen has strengthened) when the 2yr swap spread is below 250 bps. Currently it is only 83 bps. Source: Bloomberg Finance LP Deutsche Bank Marshall Gittler, Chief Strategist EMEA Private Wealth Management FX Outlook, Feb. 2011 11 005959.01/07/11
  12. 12. Currency outlook: JPYWe look for a modestly weaker JPYBut the picture should change in 2H— We expect though that eventually the market will start to discount a rise in rates in other countries and go back to funding carry trades via JPY instead of USD.Source: Bloomberg Finance LPDeutsche Bank Marshall Gittler, Chief Strategist EMEAPrivate Wealth Management FX Outlook, Feb. 2011 12 005959.01/07/11
  13. 13. Currency outlook: JPY We look for a modestly weaker JPY Weaker Japanese economy may cause upward pressure on USD/JPY— We think this is especially so since Japan’s economic indicators are starting to surprise less on the upside, while US indicators are surprising more on the upside. That too should lead to JPY weakness over time. Source: Bloomberg Finance LP Deutsche Bank Marshall Gittler, Chief Strategist EMEA Private Wealth Management FX Outlook, Feb. 2011 13 005959.01/07/11
  14. 14. Currency outlook: JPYWe look for a modestly weaker JPY Falling C/A surplus may also put pressure on the currency % yoy % yoy— The other potential concern for the yen is the current account surplus. As China tightens policy and activity there slows, Japan’s exports may struggle.— Japan is the one major exporting country whose exports have not yet recovered back to the level before the crash. This may be because of JPY strength. We think further JPY strength would be damaging for the economy and therefore the government is likely to take steps to prevent it if it starts happening. Source: Bloomberg Finance LP Deutsche Bank Marshall Gittler, Chief Strategist EMEA Private Wealth Management FX Outlook, Feb. 2011 14 005959.01/07/11
  15. 15. Currency outlook: CHF We look for a modestly weaker CHF SNB intervention kept CHF from strengthening vs EUR Risk averse/ CHF % strengthening Risk averse CHF % strengthening Risk seeking CHF weakening Risk seeking CHF weakening— The impact of the SNB’s intervention can be seen clearly in these graphs. USD/CHF followed the risk aversion index fairly closely, but EUR/CHF has diverged from it considerably – particularly when the market was risk averse and therefore one would expect buying CHF against EUR such as in late 2009.— We expect that over the next year, as concerns about the global economy and the Eurozone’s problems continue to fade, risk aversion will recede and EUR/CHF can move up somewhat.— The risk in the short term however is that the hopes for the Eurozone to solve its problems are already in the market and there could be some disappointment if there are any bumps in the process. Source: Bloomberg Finance LP Deutsche Bank Marshall Gittler, Chief Strategist EMEA Private Wealth Management FX Outlook, Feb. 2011 15 005959.01/07/11
  16. 16. Currency outlook: CHF We look for a modestly weaker CHF CHF already overvalued vs USD 25% overvalued 25% undervalued— We think it will be difficult for CHF to gain further on USD as it is already 25% overvalued (taking an average of PPP valuation based on CPI and PPI).— EUR/CHF is fairly valued on that basis, but only after massive intervention in the FX market by the Swiss National Bank. Source: Bloomberg Finance LP Deutsche Bank Marshall Gittler, Chief Strategist EMEA Private Wealth Management FX Outlook, Feb. 2011 16 005959.01/07/11
  17. 17. Currency outlook: Commodity currenciesCommodity currencies are moving more with rates than commodities— Two major factors support the commodity currencies: commodities, of course, but also interest rates.— The currencies seem to be tracking rate expectations more closely nowadays than commodity prices.— The fact that AUD and NZD rate differentials are starting to turn down while CAD differentials remain stable makes us expect that CAD is likely to be the best performer among the three commodity currencies.Source: Bloomberg Finance LPDeutsche Bank Marshall Gittler, Chief Strategist EMEAPrivate Wealth Management FX Outlook, Feb. 2011 17 005959.01/07/11
  18. 18. Currency outlook: Commodity currenciesWe expect CAD to outperform AUD— AUD tends to follow economic activity in China. We expect the Chinese economy to slow as the government fights inflation. That may weigh on AUD.— On the other hand, the improving employment picture in Canada should allow the Bank of Canada to keep on its modest tightening trend.Source: Bloomberg Finance LPDeutsche Bank Marshall Gittler, Chief Strategist EMEAPrivate Wealth Management FX Outlook, Feb. 2011 18 005959.01/07/11
  19. 19. Currency outlook: EMEM countries are adjusting via inflation, not FX revaluation— EM countries are resisting FX appreciation and instead are intervening in the market to keep their currencies from rising vs USD.— The increase in the money supply arising from the intervention is one reason why inflation in these countries is rising so much. This is causing further adjustment nonetheless, because even if the nominal rate stays stable, it is effectively an appreciation of the currency with the higher inflation rate.Source: Bloomberg Finance LP, DB Global Investment SolutionsDeutsche Bank Marshall Gittler, Chief Strategist EMEAPrivate Wealth Management FX Outlook, Feb. 2011 19 005959.01/07/11
  20. 20. Currency outlook: DB Currency IndicesWe expect carry to continue to perform — Looking at the three DB currency indices, carry has done fairly well since bottoming out in late August (+7.1%) but momentum has not really done anything since mid- 2009, and valuation is down 7.3% from its peak in June. — As a result, the overall index was fairly steady last year (+0.7%) and is up only slightly (+0.3%) this year. — We feel the outlook for carry is good. Risk aversion is on the wane and with inflation rising in EM countries, we expect they are likely to raise their interest rates further. — Valuation however does not seem compelling to us right now as several of the major currencies are relatively near fair value against each other.Source: Bloomberg Finance LP, DB Global Investment SolutionsDeutsche Bank Marshall Gittler, Chief Strategist EMEAPrivate Wealth Management FX Outlook, Feb. 2011 20 005959.01/07/11
  21. 21. Important notes"Investments are subject to investment risk, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value ofinvestments can fall as well as rise and you might not get back the amount originally invested at any point in time."Investments in Foreign Countries - Such investments may be in countries that prove to be politically or economically unstable. Furthermore, in the case of investments in foreign securities orother assets, any fluctuations in currency exchange rates will affect the value of the investments and any restrictions imposed to prevent capital flight may make it difficult or impossible toexchange or repatriate foreign currency.Foreign Exchange/Currency - Such transactions involve multiple risks, including currency risk and settlement risk. Economic or financial instability, lack of timely or reliable financialinformation or unfavorable political or legal developments may substantially and permanently alter the conditions, terms, marketability or price of a foreign currency. Profits and losses intransactions in foreign exchange will also be affected by fluctuations in currency where there is a need to convert the products denominations) to another currency. Time zone differencesmay cause several hours to elapse between a payment being made in one currency and an offsetting payment in another currency. Relevant movements in currencies during the settlementperiod may seriously erode potential profits or significantly increase any losses.High Yield Fixed Income Securities - Investing in high yield bonds, which tend to be more volatile than investment grade fixed income securities, is speculative. These bonds are affected byinterest rate changes and the creditworthiness of the issuers, and investing in high yield bonds poses additional credit risk, as well as greater risk of default.Hedge Funds - An investment in hedge funds is speculative and involves a high degree of risk, and is suitable only for "Qualified Purchasers" as defined by the U.S. Investment CompanyAct of 1940, as amended, and "Accredited Investors" as defined in Regulation D of the 1933 Securities Act, as amended. No assurance can be given that a hedge funds investmentobjective will be achieved, or that investors will receive a return of all or part of their investment.Commodities - The risk of loss in trading commodities can be substantial. The price of commodities (e.g., raw industrial materials such as precious metals, industrial metals, energy,agricultural products) may be subject to substantial fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. Additionally,valuations of commodities may be susceptible to such adverse global economic, political or regulatory developments. Prospective investors must independently assess the appropriatenessof an investment in commodities in light of their own financial condition and objectives. Not all affiliates or subsidiaries of Deutsche Bank Group offer commodities or commodities-relatedproducts and services.Investment in private equity funds is speculative and involves significant risks including illiquidity, heightened potential for loss and lack of transparency. The environment for private equityinvestments is increasingly volatile and competitive, and an investor should only invest in the fund if the investor can withstand a total loss. In light of the fact that there are restrictions onwithdrawals, transfers and redemptions, and the Funds are not registered under the securities laws of any jurisdictions, an investment in the funds will be illiquid. Investors should beprepared to bear the financial risks of their investments for an indefinite period of time.Real Estate Investments - Such investments may be or become nonperforming after acquisition for a wide variety of reasons. Nonperforming real estate investments may require substantialworkout negotiations and/or restructuring. Environmental liabilities may pose a risk such that the owner or operator of real property may become liable for the costs of removal or remediationof certain hazardous substances released on, about, under or in its property. Additionally, to the extent real estate investments are made in foreign countries, such countries may prove to bepolitically or economically unstable. Finally, exposure to fluctuations in currency exchange rates may affect the value of a real estate investment.This document is for information purposes only and is not intended to be an offer or solicitation, or the basis for any contract to purchase or sell any security, or other instrument, or forDeutsche Bank to enter into or arrange any type of transaction as a consequence of any information contained herein. The products and services described in this document are notappropriate for everyone, so an interested party must make his or her own independent legal, tax, accounting and financial evaluation of their merits and risks. In general, these productsand services are not insured by any governmental entity and are subject to investment risk including possible loss of principal. Availability of these products and services may be limited byapplicable law. Any products mentioned herein are not FDIC insured and are not obligations of nor guaranteed by Deutsche Bank AG or its affiliates. Opinions expressed herein may differfrom the opinions expressed by departments or other divisions or affiliates of Deutsche Bank.This document contains forward-looking statements. Forward-looking statements are statements that are not historical facts; they include statements about our beliefs and expectations. Anystatement in this document that states our intentions, beliefs, expectations or predictions (and the assumptions underlying them) is a forward-looking statement. These statements are basedon plans, estimates and projections as they are currently available to the management of Deutsche Bank. Forward-looking statements therefore speak only as of the date they are made,and we undertake no obligation to update publicly any of them in light of new information or future events.The past performance of securities or other instruments does not necessarily indicate or predict future performance and the value of investments and income arising there from can fall aswell as rise, the investor may get back less than was invested and no assurance can be given that any portfolio or investment described herein would yield favorable investmentresults. Deutsche Bank does not provide tax, legal or accounting advice.This document may not be reproduced or circulated without our written authority. The manner of circulation and distribution of this document may be restricted by law or regulation in certaincountries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. All trademarks andservice marks on this statement belong to Deutsche Bank AG or its affiliates, except third-party trademarks or service marks, which are the property of their respective owners.“Deutsche Bank” means Deutsche Bank AG and its affiliated companies, as the context requires. Deutsche Bank Private Wealth Management refers to Deutsche Bank’s wealthmanagement activities for high-net-worth clients around the world.Deutsche Bank Marshall Gittler, Chief Strategist EMEAPrivate Wealth Management FX Outlook, Feb. 2011 21 005959.01/07/11
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