U.

S dollar is going to depreciate in the next 24 months

Group 4:
Chua Beng Huat Li Xue Qing (Jo) Takako Prateek Wang Di (Dean)
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Drivers of USD
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

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 million below 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.

The quality of jobs created

Student Debt Bubble

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 %. The

comparable figure for student loans that originated between 2010-2012 is 15.1 percent,
representing an increase in the delinquency rate by nearly 22 percent.

The Student Debt Bubble

The housing unrecovery

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.

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 jumped from 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

Government of Singapore Investment Corporation Pte Ltd.

13 October 2013

The U.S Dollar will depreciate

Impact of rise in interest rates on average homebuyer Average home price assumed to be 500k out of which 400k is borrowed. The tenure is 30 years.

Interest rate
EMI Change in EMI Annual impact

3.40% 4.50% 5.50%

2294 2547 2791 253 244

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

If the housing recovery is real then why are the lumber prices falling?

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Capital flows
Equity and bond flows
1. The great rotation from bonds to equities (specifically into developed

market equities) is well underway;

2. 3. US equity has attracted huge inflows ; 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

US current account deficit is around 4% of GDP

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Fiscal Budget Deficit

Historical Budget Balance Theory: Weak fiscal position weaker currency
4% 2% 0% -200 -2% -4% -6% -8% -1,200 -10% -12% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014(F) -1,400 -1,600 -400 -600 -800 -1,000 400 200 0

Surplus or Deficit as % of GDP (LHS) Source: Office of Management and Budget

Surplus or Deficit (In US$ Bil) (RHS)

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Long Term Inflation Differentials

Historical CPI Theory: According to PPP, higher relative long term inflation weaker currency
6% 5% 4% 3% 2% 1% 0% -1% -2% -3%

United States

Japan

Eurozone

Source: S&P
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US Dollars drop in its power

80

%
75

70

65

60

55 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

Biggest move since QE began in 2001 Purchase 7.5 trillion yen ($78.6 billion) of bonds /per month Double the monetary base in two years and will grow to 270 trillion yen by the end of 2014
Monetary Base Average Amounts Outstanding(% of GDP)
400.00% 350.00% 300.00% 250.00% 110 200.00% 100 150.00% 100.00% 50.00% 0.00% 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 Japan U.S. USDJPY 90 80 70 140 130 120

It exceeded consensus of 5.2 trillion yen /per month at April

But can it continue? Can we expect additional monetary policy? Can we expect the yen to continue weaken against $ The answer is NO

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Further QE is difficult, because high debt

General government debt (% of GDP)
300

250

200

150

100

50

0 2008 2009 2010 2011 2012f 2013f

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?

Weaker yen will cause : oil and food prices to move up Wages and oil price increase will go up making exports uncompetitive

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What will be the next BOJ action?

Expected inflation and long-term interest rates increase mean increase of financing cost for huge government debt. The new import policy has resulted in increased import costs and a rise in food and oil prices but has failed to stimulate demand. Kurodas conviction his April plan to double the nations monetary base will be enough to end deflation is confronting its biggest test with a sustained sell-off in stocks. So, the policy is not effective for Japan economy, We cannot expect further monetary policy. 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

China is acting on its plan for the RMB to become an international reserve currency. Here's a breakdown of what is happening: 1. Earlier this month, the European Central Bank announced a large currency swap arrangement with china; 2. Thechinamoneyreport.com on June 16 reported RMB-yen trade is growing 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 Currency Swap Arrangement; 5. BBC News, April 9: China and Australia in Currency Pact; 6. Thechinamoneyreport.com on June 4 reports that Singapore has launched a Yuan clearing service.
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What about EURO?

The worst is probably over.

1.

Government bond yields have fallen back to pre-crisis low. Portugal successfully returned to the bond market. Easier access to credit allows Europe to create growth instead of focusing on austerity.

2.

3.

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Voice from Germany

1. Germany will be urged to stimulate its domestic demand to help euro zone get back to growth Merkel: Strong euro is part of her campaign strategy Target 2 balances : Germany has to ensure that Euro stays intact to ensure that it receives its Target 2 balances

2. 3.

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Conclusion
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 afloat and any shock can sink it into a recession;
The only factor which has kept the U.S economy afloat is the Fedss policy of zero interest rates and Quantitative easing; Any FED action to tighten the monetary policy can put the nascent recovery at risk; We have also seen major economies trying to diversify the foreign currency reserves and are less and less inclined to finance US debt. The U.S Fed has no option but to continue printing fresh money to buy U.S. Debt and prevent US interest rates from rising.

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Thank you

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