Transcript 2008 Outlook

The Outlook for the Dollar in 2008
Jay H. Bryson, Global Economist
October 9, 2007
US Trade Weighted Dollar Major Index
March 1973 = 100
115
115
Major Currency Index: Oct @74.3
Growth Sustained
Remains Below
Trend
The Dollar’s
Slide
PCE
Continues
to
Has Renewed in
Maintain Strength
Earnest This Year.
Residential
Weakness Yet to
Infect Economy
110
110
105
105
100
100
95
95
90
90
85
85
80
80
75
75
70
70
2000
2001
2002
2003
2004
2005
2006
2007
Source: Federal Reserve Board
Wachovia Economics Group
2
Current Account Deficit
Quarterly in Billions of Dollars, Seasonally Adjusted
$0
Growth Sustained
Remains Below
Trend
The Current Account
PCE
Continues
to
Deficit
Likely Will
Maintain
Strength
Remain
“Large”
For
Some Time.
Residential
Weakness Yet to
Infect Economy
$0
-$20
-$20
-$40
-$40
-$60
-$60
-$80
-$80
-$100
-$100
-$120
-$120
-$140
-$140
-$160
-$160
-$180
-$180
-$200
-$200
-$220
-$220
Balance on Current Account: Q2 @$-190.8 B
-$240
-$240
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Source: U.S. Department of Commerce and Wachovia Corp.
Wachovia Economics Group
3
Purchases of U.S. Assets by the Foreign Private Sector
Billions USD
$350
$300
Growth Sustained
Remains Below
Trend
Foreign Purchases
PCE
Continues
to
of
U.S.
Assets Are
MaintaintoStrength
Starting
Trend A
Bit Lower.
Residential
Weakness Yet to
Infect Economy
$350
FDI: Q2 @$73.6B
Portfolio Investment: Q2 @$227.5B
$300
$250
$250
$200
$200
$150
$150
$100
$100
$50
$50
$0
$0
-$50
-$50
2002
2003
2004
2005
2006
2007
Source: Department of Commerce and Wachovia Corp.
Wachovia Economics Group
4
Foreign Purchases of U.S. Securities
12-Month Moving Sum, Billions of USD
$1200
$1,200
Private: Jul @$994 Billion
Official: Jul @$216 Billion
Growth Sustained
Remains Below
Trend
Purchases of U.S.
Assets by the
PCE
Continues
Foreign
Privateto
Maintain
Strength
Sector
Significantly
Exceed Official
Purchases.
Residential
Weakness Yet to
Infect Economy
$1000
$1,000
$800
$800
$600
$600
$400
$400
$200
$200
$0
$0
-$200
-$200
98
99
00
01
02
03
04
05
06
07
Source: Department of the Treasury and Wachovia Corp.
Wachovia Economics Group
5
Foreign Purchases of U.S. Securities by Type
12-Month Moving Sum, Billions of USD
$600
$600
Treasury: Jul @$155 Billion
Corporate: Jul @$474 Billion
Equity: Jul @$210 Billion
Agency: Jul @$154 Billion
$500
Growth Sustained
Remains Below
Trend
Purchases of Fixed
Income Securities
PCE
Continues to
Are Significantly
Maintain
LargerStrength
Than
Purchases of
Stocks.
Residential
Weakness Yet to
Infect Economy
$500
$400
$400
$300
$300
$200
$200
$100
$100
$0
$0
-$100
-$100
98
99
00
01
02
03
04
05
06
07
Source: Department of the Treasury and Wachovia Corp.
Wachovia Economics Group
6
U.S. Purchases of Foreign Assets
Billions USD
$150
$150
FDI: Q2 @$71.5B
Porfolio Investment: Q2 @$88.1B
Growth Sustained
Remains Below
Trend
U.S.
of
PCE Purchases
Continues to
Foreign Assets Are
Maintain Strength
Trending Higher.
Residential
Weakness Yet to
Infect Economy
$100
$100
$50
$50
$0
$0
-$50
-$50
2004
2005
2006
2007
Source: Department of Commerce and Wachovia Corp.
Wachovia Economics Group
7
Real Exports & Imports of Goods
20%
Growth Sustained
Remains Below
Trend
The Current Account
PCE Continues
to
Deficit
Should Get
Maintain
SmallerStrength
Going
Forward.
Year-over-Year Percent Change of 3 Month Moving Average
20%
10%
10%
0%
0%
-10%
Residential
Weakness Yet to
Infect Economy
-10%
Exports: Jul @9.1%
Imports: Jul @2.2%
-20%
1998
-20%
2000
2002
2004
2006
Source: U.S. Department of Commerce and Wachovia Corporation
Wachovia Economics Group
8
Central Bank Policy Rates
8.0%
8.0%
US Federal Reserve: Oct @4.75%
Bank of England: Oct @5.75%
ECB: Oct @4.00%
Reserve Bank of Australia: Oct @6.50%
7.0%
Growth Sustained
Remains Below
Trend
Interest Rate
PCE
Continues
to
Differentials
Have
Maintain
Strength
Moved
Against
the
Dollar.
Residential
Weakness Yet to
Infect Economy
7.0%
6.0%
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
0.0%
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
Source: Bloomberg LLP and Wachovia Corp.
Wachovia Economics Group
9
U.S. Corporate Bond Spreads
(basis points, over U.S. Treasury yields)
400
Growth Sustained
Remains Below
Trend
Dislocations in
PCE
Continues
Credit
Marketsto
Maintain
Strength
Could
Cause
Growth
to Slow.
Residential
Weakness Yet to
Infect Economy
400
350
350
300
300
250
250
200
200
150
150
100
100
1996
1998
2000
2002
2004
2006
Source: Global Insight and Wachovia Corporation
Wachovia Economics Group
10
Foreign Purchases of U.S. Securities by Type
USD Billions
$1,250
Growth Sustained
Remains Below
Trend
Reduced Issuance
of Structured Fixed
PCE
Continues
to
Income
Products
Maintain
Strength
Will
Give Foreigners
Less U.S. Securities
to Buy.
Residential
Weakness Yet to
Infect Economy
$1,000
$1,250
Corporate ABS
Agency ABS
Corporate
Agency
Treasury
Equity
$1,000
$750
$750
$500
$500
$250
$250
$0
$0
July 2004 - June 2005
July 2005 - June 2006
Source: Department of the Treasury and Wachovia Corporation
Wachovia Economics Group
11
Emerging Markets Stocks & US Stocks
(index, Jan 2003 = 100)
Growth Sustained
Remains Below
Trend
Stock Market
Returns Abroad,
PCE
Continues
Especially
in to
Maintain Strength
Emerging
Markets,
Have Been Superior,
Than in the U.S.
Residential
Weakness Yet to
Infect Economy
350
350
300
300
250
250
200
200
150
150
100
100
50
MSCI Emerging Markets (Local)
S&P 500
50
0
Jan 2003
0
Jan 2004
Jan 2005
Jan 2006
Jan 2007
Source: Bloomberg LLP, Morgan Stanley Capital International, and Wachovia Corp.
Wachovia Economics Group
12
Wachovia International Economic Forecast
(Year-over-Year Percentage Change)
2007
Global Growth
Should Remain Solid.
Global
Major Economies
United States
Eurozone
Germany
France
Italy
UK
Japan
Canada
Developing Economies
China
India
Mexico
Brazil
1
GDP
2008
2009
2007
CPI
2008
2009
N/ A
N/ A
N/ A
4.4%
4.0%
4.2%
2.0%
2.5%
2.6%
1.8%
1.7%
3.0%
1.9%
2.6%
2.5%
1.9%
2.0%
2.0%
1.5%
2.2%
1.6%
2.4%
2.9%
2.3%
2.1%
2.3%
1.8%
2.3%
2.0%
2.6%
2.7%
1.9%
2.1%
1.5%
1.7%
2.2%
0.0%
2.0%
2.3%
2.1%
2.0%
1.8%
1.4%
1.7%
0.3%
1.7%
2.4%
2.0%
1.8%
1.9%
1.6%
1.9%
0.4%
1.9%
11.1%
8.8%
2.9%
4.2%
9.6%
8.3%
3.2%
3.6%
9.7%
8.4%
3.3%
3.8%
4.9%
6.7%
3.8%
3.6%
5.2%
5.8%
3.2%
3.7%
3.8%
5.5%
3.2%
3.5%
Data As of: September 12, 2007
Source: Wachovia Corp.
Wachovia Economics Group
13
Interest Rate Outlook

Due to the downside risks to growth, the Fed should cut rates again in October.

Most major foreign central banks likely will keep rates on hold for the foreseeable future.

In sum, interest rate differentials likely will not move back in the dollar’s favor for some time.
Wachovia International Interest Rate Forecast
(End of Quarter Rates)
United States
Japan
Euroland
U.K.
Canada
1
2007
Q4
5.08%
0.90%
4.20%
5.90%
4.60%
Q1
4.93%
0.90%
4.20%
5.75%
4.60%
3-Month LIBOR
2008
Q3
Q2
4.88%
4.88%
1.10%
1.10%
4.20%
4.20%
5.40%
4.90%
4.60%
4.60%
2009
Q4
4.88%
1.10%
4.20%
4.90%
4.60%
Q1
5.13%
1.10%
4.20%
4.90%
4.60%
Q2
5.38%
1.10%
4.20%
4.90%
4.60%
2007
Q4
4.90%
1.70%
4.40%
5.10%
4.50%
Q1
4.90%
1.80%
4.60%
5.00%
4.60%
10-Yr Government Security
2008
Q3
Q2
Q4
5.00%
5.00%
5.00%
1.90%
1.95%
2.00%
4.70%
4.75%
4.75%
4.90%
4.80%
4.80%
4.70%
4.75%
4.75%
Q1
5.10%
2.00%
4.70%
4.90%
4.70%
2009
Q2
5.20%
1.95%
4.65%
5.00%
4.65%
Q3
5.30%
1.90%
4.60%
5.10%
4.60%
Data As of: Sept 12, 2007
Wachovia Economics Group
14
Wachovia Major Currency Outlook
(End of Quarter Rates)
2007
Q4
2008
Q1
Q2
2009
Q3
Q4
Q1
Q2
Q3
Major Currencies
Euro ($/ €)
U.K. ($/ £)
U.K. (£/ €)
Japan (¥/ $)
1.42
2.05
0.69
115
1.44
2.06
0.70
112
1.46
2.07
0.71
110
1.47
2.08
0.71
108
1.48
2.09
0.71
106
1.49
2.09
0.71
105
1.50
2.10
0.71
104
1.50
2.10
0.71
104
Other Industrialized
Canada (C$/ US$)
Switzerland (CHF/ $)
Norway (NOK/ $)
Sweden (SEK/ $)
Australia (US$/ A$)
1.00
1.18
5.40
6.50
0.88
0.98
1.16
5.30
6.35
0.90
0.97
1.14
5.20
6.25
0.91
0.96
1.12
5.10
6.20
0.92
0.95
1.10
5.00
6.15
0.93
0.95
1.08
4.90
6.10
0.93
0.94
1.07
4.80
6.00
0.94
0.94
1.07
4.80
6.00
0.94
1
Data As of: October 8, 2007
Source: Wachovia Corp.
Wachovia Economics Group
15
Wachovia Emerging Market Currency Outlook
2007
Developing Economies
Mexico (MXN/ $)
Brazil (BRL/ $)
Poland (PLN/ $)
Russia (RUB/ $)
Turkey (TRY/ $)
South Africa (ZAR/ $)
China (CNY/ $)
India (INR/ $)
Korea (KRW/ $)
Singapore (S$/ US$)
Taiwan (TWD/ $)
1
2008
2009
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
10.90
1.85
2.65
24.75
1.18
6.90
7.40
39.25
920
1.48
32.50
10.80
1.80
2.60
24.25
1.16
6.80
7.25
39.00
910
1.46
32.25
10.70
1.75
2.55
23.75
1.14
6.70
7.15
38.75
900
1.44
32.00
10.60
1.72
2.50
23.50
1.13
6.65
7.00
38.50
890
1.43
31.75
10.50
1.70
2.45
23.25
1.12
6.60
6.85
38.25
880
1.42
31.50
10.45
1.67
2.42
23.00
1.11
6.55
6.70
38.00
875
1.41
31.25
10.40
1.65
2.40
22.75
1.10
6.50
6.50
37.75
870
1.40
31.00
10.40
1.65
2.40
22.50
1.10
6.50
6.40
37.50
870
1.40
30.75
Data As of: October 8, 2007
Source: Wachovia Corp.
Wachovia Economics Group
16
ABS Issuance
USD Billions
$300
Growth Sustained
Remains Below
Trend
The Dollar Could
PCE
Continues
to
Strengthen
if Risk
Maintain
Strength
Taking Becomes
Rampant Again.
Residential
Weakness Yet to
Infect Economy
$300
$250
$250
$200
$200
$150
$150
$100
$100
$50
$50
$0
$0
Jan-2006
Apr-2006
Jul-2006
Oct-2006
Jan-2007
Apr-2007
Jul-2007
Source: Asset-Backed Alert and Wachovia Corporation
Wachovia Economics Group
17
Value of Assets at the End of 2006
in trillions of dollars
$16
Growth Sustained
Remains Below
Trend
Foreign Investors
PCE
Continues
to
Will
Not
Likely Begin
Maintain
Strength
to Dump
U.S.
Assets.
$12
$12
$8
$8
Other
$4
Residential
Weakness Yet to
Infect Economy
$16
$4
Stocks & FDI
Official
Bonds
$0
$0
Foreign Assets Held by Americans
U.S. Assets Held by Foreigners
Source: U.S. Department of Commerce and Wachovia Corp.
Wachovia Economics Group
18
 The Large Current Account Deficit in Conjunction with Narrowing
Interest Rate Differentials Have Weighed on the Dollar.
 Although the Current Account Deficit Will Gradually Shrink, Interest
Rate Differentials Are Not Likely to Move Back in the Dollar’s Favor
Anytime Soon.
Summary
 In Addition, Reduced Issuance of Structured Fixed Income Products
Will Give Foreign Investors Fewer U.S. Assets to Buy.
 The Dollar Could Strengthen, at Least Temporarily, if Risk Taking
Becomes Rampant Again.
 The Probability of a Dollar “Meltdown” Is Rather Small.
Wachovia Economics Group
19
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Appendix
John E. Silvia, Ph.D.
Mark Vitner
Jay H. Bryson, Ph.D.
Chief Economist
Senior Economist
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