Transcript Introduction To Foreign Exchange

Euroland woes continuing to weigh? The case
for globalisation of UK trade grows
Neil Parker – RBS Market Strategist
June 2012
1
Contents
1. Growth – Euroland to remain the anchor restraining growth?
2. Interest rate rises – When will we see you again?
3. UK growth – waiting for certainty (and a kick start from the BoE)
4. Euroland – recapitalisations and bailouts remain the focus
5. The US – more QE to follow?
6. FX market forecasts
7. The latest Reuters polls
8. Summary
2
Growth – Euroland to remain the anchor restraining growth?
2010 (A)
GDP
2011 (F)
2012 (F)
2013 (F)
US
3.0
1.7
2.5
2.5
Euroland
Euroland
UK
UK
1.9
1.7
2.1
1.4
1.5
1.6
0.7
1.0
-0.2
-0.2
0.6
1.6
0.8
India
8.6
7.0
6.8
7.3
China
10.4
9.2
8.3
8.4
Japan
4.4
-0.7
1.5
1.5
RBS World
5.0
3.5
3.4
3.8
1.8
Source:RBS
US improvements have slowed, although
surveys are generally pointing towards a
continued economic recovery.
Growth in
Asia is expected to slow somewhat in 2012, but this
slowdown is likely to be modest and brief.
Euroland still has many problems, and efforts to
reduce debt and deficit burdens have proven
unconvincing so far.
3
Interest rate rises – When will we see you again?
Policy Rate (%) - end period
2010 (A)
2011 (F)
2012 (F)
2013 (F)
US
0.1
0.1
0.1
0.1
Euroland
1.0
1.0
0.5
0.5
UK
0.5
0.5
0.5
0.5
India
5.3
8.5
7.8
7.0
China
5.8
6.6
6.8
7.3
Japan
0.1
0.1
0.1
0.3
Source:RBS
Rates in the Western world will be rising no time
soon, but eventually rates will have to move higher
to compensate for all the QE.
UK and Euroland
recently fluffed
their lines in
terms of
monetary
loosening.
China rate view
under review
after recent rate
cut. Shows how
worried they are
re the global
economy.
The UK added more QE (another £50bn in Feb)
which may not be the last bout of easing we see
from the central banks
4
UK growth – waiting for certainty (and a kick start from the BoE?)
2010
2011
2012
2013
%y/y
Consumers' expenditure
1.2
-1.2
0.7
1.3
Government consumption
1.5
0.1
1.0
-1.5
Fixed investment
3.1
-1.2
0.7
5.4
GDP
2.1
0.7
0.2
1.9
UK back in recession
in Q1 ‘12
see column for measure
Unemployment rate (%)
7.9
8.1
8.6
8.7
CPI (%y/y)
3.3
4.5
2.9
1.6
Policy rate (%)
0.5
0.5
0.5
0.5
Recession likely to
prove shallow and
short-lived
Source:RBS
The UK survey data has shown signs of
improvement in recent months, but as yet
this has not fed through into official stats.
The UK economy should see and improvement in the
second half of the year, supported by further monetary
loosening and improving credit conditions.
5
UK growth – the domestic problems remain
Public sector taxation & expenditure (% of GDP)
UK consumer spending neither can, nor
should, shoulder the burden of returning
the UK to growth. Arguments suggesting
that the govt should spend more to lift the
UK out of recession also don’t stack up.
50
Total Managed Expenditure
48
Current receipts
46
44
42
40
38
36
Household debt-to-income, %
34
1990
1995
2000
2005
2010
170
15/16
160
UK Real Household Disposable Income, % y/y
150
9
8
140
7
130
6
5
120
4
110
3
2
100
1
0
90
-1
80
-2
-3
60
65
70
75
80
85
90
95
00
05
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
10
6
Euroland – recapitalisations and bailouts remain the focus
2010
2011
2012
2013
-0.4
-0.6
-1.3
-0.1
0.5
-0.2
1.2
0.7
%y/y
Consumers' expenditure
Government consumption
Fixed investment
GDP
0.9
0.5
-0.7
1.9
0.2
0.0
1.5
1.5
see row for measure
Unemployment rate (%)
CPI (%y/y)
Policy rate (%)
10.1
1.6
1.0
10.2
2.7
1.0
11.0
2.3
0.5
11.3
1.5
0.5
Source:RBS
Spain
Now the problem child of
the euro is the Spanish
economy and notably its
domestic banking situation
(the €100bn bailout of the
banks at the weekend is the
4th bailout to be paid).
7
Our latest forecasts for the
Euro zone economy points
to a contraction this year,
with even the likes of
Germany and France
struggling for momentum
The US – more QE to follow?
2010
2011
2012
2013
%y/y
Consumers' expenditure
2.0
2.2
2.3
2.1
Government consumption
0.7
-2.1
-1.7
-0.2
Business fixed investment
4.4
8.8
5.8
7.7
GDP
3.0
1.7
2.3
2.5
see row for measure
Unemployment rate (%)
9.4
8.5
7.7
7.2
CPI (%y/y)
1.6
3.1
2.3
2.3
Policy rate (%)
0.1
0.1
0.1
0.1
Source: RBS
The US economy has printed the strongest growth
of the big 3 Western economies and that is now
showing through in the form of improving labour
market conditions.
8
But, recent figures suggest
firms are holding back as
concerns regarding the
Euroland economy intensify.
FX forecasts – the latest RBS numbers
2012
Q3
Q4
Q1
2013
Q2
GBP/USD
1.57
1.55
1.52
1.50
1.52
EUR/USD
1.29
1.27
1.24
1.21
1.18
GBP/EUR
1.22
1.22
1.23
1.24
1.29
GBP/JPY
129
127
125
125
128
GBP/PLN
5.29
5.19
5.09
5.02
5.15
GBP/BRL
3.14
2.95
2.89
2.85
2.89
GBP/CNY
9.84
9.67
9.48
9.36
9.48
GBP/INR
84.8
80.6
78.3
76.5
76.0
Q3
GBP/USD – heading nowhere in
the remainder of this year, but
risks to the downside remain if
the UK economy doesn’t pick up.
EUR/USD is also set for
improvement in H2 ’12 but
further woes for the euro remain
whilst the crises persist.
forecasts are end period
Some emerging economies may see their
currencies improve against the GBP, but
greater gains are expected against the
USD.
9
10
1.650
1.659
1.708
1.727
1.597
1.589
1.580
1.571
1.641
0
1.689
1
1.633
2
1.671
3
1.624
4
1.652
5
1.615
6
1.633
7
1.606
1 Year GBP/USD
1.615
1.596
1.577
1.559
1.540
1.35
1.562
1.553
1.75
1.521
source: Reuters
1.503
Min
1.545
1.45
1.484
1.50
1.536
1.55
1.465
Mean
1.527
1.60
1.447
RBS
1.518
1.65
1.509
Max
1.428
1.40
1.501
1.70
1.409
1.391
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
FX markets – Reuters polls: GBP/USD
3 Month GBP/USD
9
8
7
6
5
4
3
2
1
0
11
1.327
1.317
1.348
1.362
1.307
1.333
1.256
1.246
1.236
1.226
1.216
1.206
1.196
1.185
1.297
0
1.319
1
1.287
2
1.304
3
1.277
4
1.290
5
1.267
1 Year GBP/EUR
1.276
1.261
1.247
1.232
1.218
source: Reuters
1.204
1.189
1.00
1.175
Min
1.175
1.15
1.160
1.20
RBS
1.165
Mean
1.146
1.25
1.155
1.30
1.132
1.05
1.145
1.35
1.117
1.10
1.103
1.40
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
FX markets – Reuters polls: GBP/EUR
1.45
3 Month GBP/EUR
Max
9
8
7
6
5
4
3
2
1
0
Summary
• Euroland’s troubles continue to act as a drag on global GDP. A solution to the crisis must be found soon, and
must involve all Euroland authorities first and foremost.
• The US economy began 2012 better than expected with more jobs created and better survey data being the key
standouts. Recent figures have suggested a slowdown in activity (most likely because of euro area uncertainty).
• Both the UK and Euroland economies have had a lacklustre start to 2012, with both seeing output falling or
stalling in Q1 ‘2012, after already having reported declines in growth in Q4 2011.
• Interest rates rises remain off the agenda for all economies. More QE to come?
• The USD should do well against the other majors for a few months yet, but further gains are likely to be
driven by expectations of greater Euroland chaos and crisis (and the knock on to risk appetite and international
trade/financial markets).
• The solution to the global growth problem is not more government debt in the West. Instead, the West
should focus on tapping into the faster growing economies of the BRICs and other Eastern, Middle Eastern and
Latin American economies.
12
Disclaimer
This communication has been prepared by The Royal Bank of Scotland N.V., The Royal Bank of Scotland plc or an affiliated entity ('RBS'). This material
should be regarded as a marketing communication and has not been prepared in accordance with the legal and regulatory requirements to promote the
independence of research and may have been produced in conjunction with the RBS trading desks that trade as principal in the instruments mentioned
herein. This commentary is therefore not independent from the proprietary interests of RBS, which may conflict with your interests. Opinions expressed may
differ from the opinions expressed by other divisions of RBS including our investment research department. This material includes references to securities
and related derivatives that the firm's trading desk may make a market in, and in which it is likely as principal to have a long or short position at any time,
including possibly a position that was accumulated on the basis of this analysis material prior to its dissemination. Trading desks may also have or take
positions inconsistent with this material. This material may have been made available to other clients of RBS before it has been made available to you and
regulatory restrictions on RBS dealing in any financial instruments mentioned at any time before is distributed to you do not apply. This document has been
prepared for information purposes only. It shall not be construed as, and does not form part of an offer, nor invitation to offer, nor a solicitation or
recommendation to enter into any transaction or an offer to sell or a solicitation to buy any security or other financial instrument. This document has been
prepared on the basis of publicly available information believed to be reliable but no representation, warranty or assurance of any kind, express or implied, is
made as to the accuracy or completeness of the information contained herein and RBS and each of their respective affiliates disclaim all liability for any use
you or any other party may make of the contents of this document. This document is current as of the indicated date and the contents of this document are
subject to change without notice. RBS does not accept any obligation to any recipient to update or correct any such information. Views expressed herein are
not intended to be and should not be viewed as advice or as a recommendation. RBS makes no representation and gives no advice in respect of any tax,
legal or accounting matters in any applicable jurisdiction. You should make your own independent evaluation of the relevance and adequacy of the
information contained in this document and make such other investigations as you deem necessary, including obtaining independent financial advice, before
participating in any transaction in respect of the securities referred to in this document. This document is not intended for distribution to, or use by any person
or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The information contained herein is
proprietary to RBS and is being provided to selected recipients and may not be given (in whole or in part) or otherwise distributed to any other third party
without the prior written consent of RBS. RBS and its respective affiliates, connected companies, employees or clients may have an interest in financial
instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding or acting as
market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial
instruments referred to herein. This marketing communication is intended for distribution only to major institutional investors as defined in Rule 15a-6(a)(2) of
the U.S. Securities Act 1934. Any U.S. recipient wanting further information or to effect any transaction related to this trade idea must contact RBS Securities
Inc., 600 Washington Boulevard, Stamford, CT, USA. Telephone: +1 203 897 2700.
The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of
Scotland plc is authorised and regulated by the Financial Services Authority.
The Royal Bank of Scotland N.V., established in Amsterdam, The Netherlands. Registered with the Chamber of Commerce in The Netherlands, No.
33002587. Authorised by De Nederlandsche Bank N.V. and regulated by the Authority for the Financial Markets in The Netherlands.
The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of Scotland N.V. is in
certain jurisdictions an authorised agent of The Royal Bank of Scotland plc.
© Copyright 2011 The Royal Bank of Scotland plc. All rights reserved. This communication is for the use of intended recipients only and the contents may not
be reproduced, redistributed, or copied in whole or in part for any purpose without The Royal Bank of Scotland plc’s prior express consent.
13