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GS FX tearsheets

GS FX tearsheets

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1
The Global FX Monthly AnalystGoldman Sachs Global Economics, Commodities and Strategy ResearchDecember 2009
G3
US Dollar
FX Forecasts:
We continue to expect cyclical near-term Dollar weakness, followed by a gradual Dollar recoveryfurther out. Our EUR/$ forecast remains at 1.55, 1.55 and 1.35 in 3, 6 and 12 months. Our $/¥ path remains unchangedat 98, 98 and 105. Current GSDEER: EUR/$ 1.20; $/¥ 107.
Motivation for Our FX View:
In the near term our Dollar-bearish views are driven by a combination of weak BBoPfundamentals, expectations of very easy US monetary policy and a constructive outlook for cyclical assets globally.Given the strong negative Dollar vs risky asset correlations currently observed, the latter would be consistent withDollar weakness remaining in place for some time. Further out, however, we see potential for Dollar strength; the exacttiming is uncertain but we have it pencilled in on a 12-month horizon. This is mainly due to potential structural factors,such as a possible recovery in capital inflows combined with a much narrower current account deficit, which together would ultimately push the BBoP into Dollar-supportive territory.
Monetary Policy and FX Framework:
The Fed has a dual growth and inflation target. As a result, monetary policyhas generally been more volatile and reactive than in pure inflation-targeting countries. The exchange rate floats freely;however, the US Treasury and the Fed both occasionally comment on currency issues.
Growth/Inflation Outlook:
We recently rolled out our 2010 and 2011 outlook for the US economy. We expect realGDP to grow +3% annualised in the fourth quarter, slowing to a 1.5% pace in late 2010, and then graduallyreaccelerating in 2011. We expect the unemployment rate to continue to creep up, reaching 10.75% by mid-2011. Wealso expect the large output gap to underpin disinflationary pressures, with core inflation expected to ease to 0%yoy bylate 2011.
Monetary Policy Forecast:
We expect the large output gap, high unemployment rate and disinflationary impetus tokeep the Fed on hold through 2011. The main risks to our Fed view are a much faster than expected pace of economicrecovery, or if we see a large run-up in asset prices, which could prompt earlier hikes than justified from a real-economy perspective.
Balance of Payments Situation:
We expect continued gradual improvement in the current account deficit, whichshould stabilise at around 2.5%. The trend narrowing in the US trade deficit means the US should have less difficultyattracting the necessary funding than in previous years. For now, though, we are not seeing strong capital inflows, apartfrom US Treasuries, which are likely to be largely FX-hedged anyway.Things to Watch: The Dollar may be sensitive to rate hike expectations in response to strong activity data. Overall risk sentiment also continues to be an important factor. Year-end dynamics often lead to Dollar weakness, in particular relative to European currenceis, and need to be watched in the next few weeks. We continue to monitor capital flowtrends in the monthly TIC data, given the potential for Dollar-supportive flows upon further stabilisation in the USeconomy, as mentioned above.
$bn200420052006200720082009*Current Account-631.1-748.7-803.5-968.8-706.1-406.5
Net UST Flows 93.6 132.3 -58.2 89.1 196.6 62.0Other Net BondFlows236.2 297.6 315.7 208.5 -121.7 -346.6Net Equity Flows -25.2 -98.4 2.4 110.3 55.8 5.7Net FDI Flows -170.3 76.4 -1.8 -163.8 -12.3 -70.3
BBoP-496.8-340.8-545.4-724.6-587.7-755.7
% of GDP -3.8 -2.6 -4.1 -5.2 -4.1 -5.4Official Buying 314.9 213.3 310.8 269.9 543.5 237.1
Adjusted BBoP-181.9-127.5-234.6-454.7-44.2-518.5
% GDP -1.3 -1.0 -1.6 -3.1 -0.3 -3.7
*H1 Annualised
The Outlook for the US BBoP
US: BBoP vs. Current Account
-8-7-6-5-4-3-2-101295 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
% GDP4-qtr ma
BBoPCurrent Account
Mark Tan
 
2
The Global FX Monthly AnalystGoldman Sachs Global Economics, Commodities and Strategy ResearchDecember 2009
US Dollar
GSFCI & Real GDP
97989910010110210310410510610710896 97 98 99 00 01 02 03 04 05 06 07 08 09
Index87-95=100
-5-4-3-2-10123456
% yoy
GSFCI (lhs, inverted) GDP (rhs)
Industrial Production & GDP
-15-12-9-6-30369121580 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
% yoy
Industrial ProductionGDP
M2 Growth & CPI Inflation
-4-20246810121482 84 86 88 90 92 94 96 98 00 02 04 06 08 10
% yoy
M2Consumer Price Index
Terms of Trade
8688909294969810010210410610811090 92 94 96 98 00 02 04 06 08Index1990=100
TOTImprovement
Trade Volumes
-24-20-16-12-8-404812162095 96 97 98 99 00 01 02 03 04 05 06 07 08 09
% yoy3-mth ma
ExportsImports
Current Account Balance
-220-200-180-160-140-120-100-80-60-40-2002080 82 84 86 88 90 92 94 96 98 00 02 04 06 08
US$bn
-10-9-8-7-6-5-4-3-2-101
% GDP
Current Account (rhs)Current Account % GDP (lhs)
 
3
The Global FX Monthly AnalystGoldman Sachs Global Economics, Commodities and Strategy ResearchDecember 2009
Euro
EUR/$
0.500.700.901.101.301.501.7081 83 85 87 89 91 93 95 97 99 01 03 05 07 09
SpotGSDEER
FX Forecasts:
We are maintaining our EUR/$ forecasts at 1.55, 1.55 and 1.35. EUR/¥ forecast is at 151.9, 151.9 and141.8 in 3, 6 and 12 months. Current GSDEER for EUR/$: 1.20.
Motivation for Our FX View:
We continue to expect moderate upside for the EUR/$ given our expectation of broadDollar weakness in the near term. We think the backdrop of robust global growth (outside of the relatively weaker G3)and low real interest rate environment is one that will be supportive of risk assets in general. As such, we continue toexpect the broad cyclical forces driving Dollar weakness to remain in place. That said, further out our view of a potential Dollar recovery remains intact. This is driven by the possibility that overall US broad balance of payment(BBoP) flows may turn supportive for the Dollar further down the road, on an improvement in portfolio inflows and anarrowing current account deficit. The ECB is also expected to 'normalise' policy rates before the Fed.
Monetary Policy and FX Framework:
The ECB is a strict inflation targeter. As a Central Bank serving 16 countries,the ECB is arguably the most independent Central Bank in the world. The Euro is a freely-floating currency. FX policyresponsibility is not clearly defined, but in practice the ECB is unlikely to act in FX markets, without Eurogroupapproval.
Growth/Inflation Outlook:
We expect a relatively solid recovery in Europe. Following a contraction of -3.7% thisyear, we expect Europe (EU-27) to grow by +1.7% next year and by +2.3% in 2011. As a result of the still significantoutput gaps throughout Europe, we expect core inflation in the Euro-zone to decline further to about 0.5% beforeslowly recovering. We forecast headline inflation in the Euro-zone at 1.1% next year and 1.6% in 2011.
Monetary Policy Forecast:
We expect the ECB to begin its gradual exit through the first half of next year, as alsohinted at in its latest press conference. Specifically, we now see the ECB hiking the policy rate to 1.25% during thefourth quarter of 2010, and then following this with 25bp hikes every quarter during 2011. This is a marginally later start to official rate hikes than we previously thought, partly due to greater concern about the strong Euro.
Balance of Payments Situation:
The current account balance is now close to flat, while the BBoP is in healthy surpluson a trend basis. The broad balance of payments is expected to remain positive going forward, due to strong net portfolio inflows.
Things to Watch:
The Euro will be sensitive in the near term to concerns over fiscal sustainability issues in someEuro-zone countries. The state of overall risk sentiment will also continue to be an important driver, on which weremain constructive. Reserve diversification talk also continues to be in focus and needs to be watched. This is at themargin positive for the Euro, given that it remains the only credible alternative to the USD currently. Seasonal patternssuggest the Euro could rally into year-end.
EURbn200420052006200720082009*Current Account61.611.7-10.010.7-143.4-75.1
Net Bond Flows 46.6 3.5 98.1 57.5 373.3 324.9Net Equity Flows -2.3 105.0 90.6 93.7 -22.9 108.1Net FDI Flows -79.6 -205.7 -160.3 -72.7 -189.1 -98.4
BBoP26.3-85.518.489.217.9259.6
(% of GDP) 0.3 -1.1 0.2 1.0 0.2 2.9
*First 9 months annualised
The Outlook for the Euroland BBoP
Mark Tan

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