Transcript FX and Macro Outlook

07 June 2013
07 June 2013
FX and Macro Outlook
John Shin +1 646 855 9342
FX Strategist
MLPF&S
[email protected]
USD: Broadly higher, with EUR-USD forecast to be lower, to 1.25
year-end
EM FX: RMB end-2014e at 5.88
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11283585
Refer to important disclosures on page 67-71.
1
07 June 2013
Central banks back on focus
 US: Fed likely doing full QE through end of year, through Q1
 Europe: ECB worrying about recession, may act further
 Japan: New regime for the BOJ
 We are optimistic for the US, but rally may be too soon
2
Inflation divergence
07 June 2013
Inflation: G10
6
Inflation: “Majors”
%
% yoy
5.0
US
5
EZ
4
CA
3
UK
SZ
2%
2
4.5
4.0
3.5
3.0
NO
2.5
1
SW
2.0
0
AU
1.5
NZ
1.0
JP
0.5
-1
-2
Forecast
US
EZ
UK
CA
0.0
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
 Note the broad scale since 2011: lower
 Inflation is generally falling in G10, and low in the majors (2% is general “target”)
 Forecast inflation remaining lower
Source: Bureau of Labor Statistics and BofA Merrill Lynch Global Research
3
US: still middling
07 June 2013
2012
2013E
2014E
2013
Q1
Real GDP(% qqar)
2.2
1.8
2.7
2.4
1.8
1.5
2.5
CPI (% yoy)
2.1
1.6
1.6
1.4
1.8
1.7
1.8
Policy Rate (end)
0.25
0.25
0.25
0.25
0.25
0.25
0.25
FscGovBal(%/GDP)
-6.9
-4.0
-3.3
CurActBal(%/GDP)
-3.0
-3.0
-3.2
US
2013
Q2E
2013
Q3E
2013
Q4E
Source: BofA Merrill Lynch Global Research
 Still disappointing this year
 Fed policy tied to macro outlooks
 Our US Economics team has expects relatively weaker growth
 Year-end US 10yr rate target: 2.25%
4
Fed: not tightening soon
07 June 2013
“Appropriate timing of policy firming”
Number of voters
Balance Sheet expanding
USDt
3.5
14
QE3
12
3.0
10
2.5
8
2.0
6
1.5
4
1.0
2
0.5
0
0.0
2003
QE2
Balance Sheet
2013
2014
2015
2016
Reserve Balances
QE1
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Bloomberg and BofA Merrill Lynch Global Research
• Initial goal of unemployment to 6.5%
• Inflation around 2% goal within half a percentage point one to two years ahead
• LT inflation expectations well-anchored
5
US Employment: unemployment
07 June 2013
Unemployment &
Labor Force Participation
Unemployment rate surprising
%
% LFP
12
% UR, rev erse
68
3
4
10
67
5
8
6
66
6
7
65
8
4
Labor Force Particip (LHS)
0
1948
9
64
2
Unemp Rate (RHS, rev erse)
10
63
1958
1968
1978
1988
1998
2008
11
1980
1985
1990
1995
2000
2005
2010
 GDP growth has not explained shifts in the unemployment rate both up and down
 Labor force participation has been a key concern
 We look for unemployment to end the year at 7.5%
Source: Bureau of Labor Statistics and BofA Merrill Lynch Global Research estimates
6
US Employment: Payroll work to do
07 June 2013
Long way to go on total payrolls
Monthly payrolls over the last year
k
mn
350
140
135
130
125
120
115
110
105
100
95
90
85
300
250
200
150
100
13.4 mn people entered the labor
force since January 2000
50
0
Jun
1980
1985
1990
1995
2000
2005
July
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
2010
 Still an active gap in employment
 Sustained 200K employment likely needed, which has been very lacking
 We still remain concerned with future sequester impact
Source: Bureau of Labor Statistics and BofA Merrill Lynch Global Research estimates
7
Labor market: complexities
07 June 2013
Labor force participation (total)
% pop
68
LFP (age groups)
% pop
100
67
90
66
80
65
70
64
60
63
50
62
40
61
30
60
20
59
10
58
0
1950
1960
1970
1980
1990
2000
2010
1950
35-44
45-54
55-64
65-over
1960
1970
1980
1990
2000
2010
 Labor force participation has dropped sharply
 Difficulty in discerning discouraged workers versus demographics
 Arithmetically, we argue around half the drop in LFP is demographic
Source: Bloomberg and BofA Merrill Lynch Global Research
8
Labor force participation rate
07 June 2013
Demographics explain
around half the decline
We forecast LFPR to move
sideways to get back to trend
Only population
68
ajdustments
67.0
67
66
66.0
65
68.0
Forecasts
only
demographic
changes
64
63
65.0
Actual
64.0
participation rate
63.0
62
61
baseline
60
2000
2002
2004
2006
2008
2010
2012
1990
1995
2000
2005
2010
2015
2020
2025
Source: Bureau of Labor Statistics and BofA Merrill Lynch Global Research
 Labor market confusion – there are three states of the labor market:
(1) “Employed” (2) “Unemployed but in labor force” (3) “Out of the labor force”
 Unemp rate sounds like there are only two states, (1) and (2)
 LFPR is reason to expect a “good” slow unemployment improvement
9
Price pressures, short and long-term
07 June 2013
Headline & Core CPI
Headline inflation by chair
Avg %
7.0
% y-o-y
16
14
Feb70-Jan78
Aug79-Aug87
6.0
12
CPI %yoy
5.0
Core CPI %yoy
10
8
4.0
Aug87-Jan06
6
3.0
4
2
Apr51-Jan70
Feb06-Now
2.0
0
1.0
-2
-4
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
Current inflation pressures
% yoy
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2010
QE2
CPI
Core CPI
Core PCE
0.0
Martin
Burns
Volcker
Greenspan
Bernanke
 Inflation has been heading lower,
and low since QE-x began
 Note QE3 environment very
different than QE2 (commodities)
 Unlikely Bernanke serves a third
term; second term ends
2011
2012
2013
Source: Bureau of Labor Statistics and BofA Merrill Lynch Global Research
10
07 June 2013
Fed: inflation sensations?
Inflation expectations modest (5y5y)
3.5
Expectations of first rate hike
%
40
3.0
35
2.5
30
2.0
Months to first Fed tightening
25
20
1.5
15
1.0
10
0.5
5
0.0
May-07 Mar-08 Jan-09 Nov-09 Sep-10 Jul-11 May-12 Mar-13
0
Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Source: Bloomberg and BofA Merrill Lynch Global Research
• QE1 took place immediate in crisis aftermath (start-2009): $1.75tr of mostly MBS
• QE2 really addressing disinflation risks (end-2010): $600bn of TSY
• QE3 has less clear immediate “Japan-style” motivation
11
Central banks in action
07 June 2013
Central bank rates:
LB (lower bound)
Central bank balance
sheets (“QE”) over time
%
%
6
40
ECB
5
Fed
4
ECB
35
30
BOE
FED
BOJ
25
BOE
3
20
BOJ
15
2
10
1
5
0
2006
2007
2008
2009
2010
2011
2012
2013
0
Mar-99
Mar-01
Mar-03
Mar-05
Mar-07
Mar-09
Mar-11
Mar-13
Source: Bloomberg and BofA Merrill Lynch Global Research
 ECB balance sheet had expanded for “LTROs”, not QE
 In any event, US balance sheet has much company
 Link from “money printing” to currency very hazy
12
Long rates for global economy
07 June 2013
Real 10y rates
Nominal 10yr rates
(Nominal – inflation)
%
7
7
US
GE (EZ)
JP
UK
6
5
%
US
GE (EZ)
JP
UK
6
5
4
3
4
2
3
1
2
0
-1
1
-2
-3
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Bloomberg and BofA Merrill Lynch Global Research
 We would argue macro factors are driving rates lower
 Japan has lowest nominal rates, highest real rates
13
A need for building
07 June 2013
 Pent-up household formation will be realized over the next few years.
 We estimate a shortfall of about 2.5 million households from the past five years.
 We expect housing starts of 975,000 this year, up from 780,000 in 2012.
Pent-up household formation
(thousands of households)
Housing starts bouncing
(thousands of homes, saar)
Forecasts
2000
2500
Forecast
2250
1800
1600
2000
1400
1750
1200
1500
1000
800
1250
600
400
1000
200
750
Source: Census Bureau, BofA Merrill Lynch Global Research
14
20
11
20
08
20
05
20
02
20
99
19
96
19
93
19
90
19
87
19
84
500
19
19
81
0
65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16
Source: Census Bureau, BofA Merrill Lynch Global Research
14
Households in rehab
07 June 2013
 Slow deleveraging process and repair of household balance sheets.
 Financial wealth has recovered significantly and housing wealth slowly gaining.
 Debt service is helped by low rates, easing the adjustment.
Household balance sheets are impaired
(net worth and debt, % disposable income)
Debt service ratio has declined
(ratio of debt-service payments to disposable personal income, %)
650
160
140
14.0
120
13.5
100
13.0
600
Household debt, rhs
550
80
500
14.5
60
12.5
12.0
11.5
40
450
Household net
worth, lhs
400
1952
1957 1962 1967
1972 1977
1982 1987
1992 1997 2002
Source: BofA Merrill Lynch Global Research, Federal Reserve
2007 2012
11.0
20
10.5
0
10.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
15
Forecast: Oil demand softer
07 June 2013
Lower global oil demand growth,
to 800K b/d from 950K
Prices and forecasts
Brent crude oil: forecast versus forward
130
Global oil demand growth
3,000
$/bbl
BofAML
f'casts
k b/d, YoY
125
2,500
120
2,000
BofAML forecast
115
110
1,500
1,000
105
500
100
0
95
forward
90
85
Jan11
-500
-1,000
Jul11
Jan12
Jul12
Jan13
Jul13
Jan14
Jul14
2006 2007 2008 2009 2010 2011 2012 2013 2014
forecast
previous forecast
Source: BofA Merrill Lynch Global Research
 Look for 2013 oil average around 105/bbl (brent), $92/bbl (crude)
 Risks of $50 crude
 After 2014, structural possibility of $90-$100 oil
16
Energy efficiency at key margins
07 June 2013
US real GDP and highway
miles driven
14
index
US light duty vehicle fleet
average miles per gallon (MPG)
US real GDP and highway miles driven
(12-month moving average)
bn miles/month 265
13
12
US light duty vehicle fleet, average miles per gallon (MPG)
55
255
50
245
45
235
miles per gallon
CAFE proposed
CAFE enacted
40
35
11
225
30
10
215
25
20
205
9
195
8
185
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
recession real GDP highway miles driven (rhs)
BofAML forecast
to 2017
15
10
1980
1985
1990 1995 2000 2005 2010 2015 2020
CAFE standards for new light duty vehicles
fleet average for light duty vehicles
2025
 Highway miles have dropped since early 2000s
 We expect fleet replacement rates and Corporate Average Fuel Efficiency
standards to increase materially to 2017
Source: Bloomberg; BofA Merrill Lynch Global Research
17
07 June 2013
EUR and Europe
We have target of 1.25 for end-2013
 The question is, have European sovereign debt issues been solved?
 Europe now working through recession this year and next
 Cyprus
 Spain asking for aid?
 Italy election
 Greece headlines have not gone away for good
18
EZ: Recession
07 June 2013
Eurozone
2012
2013E
2014E
2013
Q1
2013
Q2E
2013
Q3E
2013
Q4E
Real GDP(% qoq)
-0.5
-0.6
0.5
-0.2
0.0
0.1
0.1
CPI (% yoy)
2.5
1.4
1.3
1.9
1.4
1.3
1.1
Policy Rate (end)
0.75
0.50
0.50
0.75
0.50
0.50
0.50
FscGovBal(%/GDP)
-3.2
-2.9
-2.7
CurActBal(%/GDP)
1.1
2.3
2.6
Source: BofA Merrill Lynch Global Research
 European economy continues to shrink
 Increasing chances of more ECB action
 Inflation moving below 2%
19
EUR: rates and FX
07 June 2013
Interest rate differentials for EUR
EUR-USD
2yr rate spread, EZ-US
1.55
1.5
1.50
1.3
1.45
1.1
0.9
1.40
0.7
1.35
0.5
1.30
0.3
1.25
0.1
1.20
1.15
-0.1
EUR-USD (left)
2yr rate spread, EZ-US (right)
1.10
 Early rate hikes in 2011,
responding to oil prices, helping
push EUR from 1.30s to high 1.40s
 Recall also ECB hiking in 2008 on
previously high oil prices
 Note the eventfulness of 2010:
Greek crisis and QE2 give EUR
round-trip between 1.40 and 1.20
 Also possible “diminishing returns”
to QE3: staircase-like from 1.60 in
Summer 2008 to ~1.50 in QE1 to
~1.40 in QE2 to ~1.30s now
-0.3
-0.5
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Source: Bloomberg and BofA Merrill Lynch Global Research
20
Debt now and over time
07 June 2013
Evolution of Debt/GDP ratios
for key Europe since 2000
Debt/GDP ratios for key countries
%/GDP
160
%/GDP
180
Greece
140
160
120
140
Italy
120
100
100
80
Portugal
80
60
Germany
60
Spain
40
40
20
20
0
Ireland
0
Greece Italy Ireland Port Spain
US
Ger
Fr
UK
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: International Monetary Fund and BofA Merrill Lynch Global Research
 Key issue is that so many countries have debt worries (left chart)
 Note, however, many countries did not have high debt (right chart)
 The key in rates and debt: banking difficulties
21
EZ Banks: The Periphery Risks
07 June 2013
EURbn: GR, PO, IR
EURbn
3,500
Germany
3,000
EURbn: Spain, Italy
250
1800
240
1700
230
1600
220
2,500
2,000
210
1500
200
1400
190
1300
180
1,500
France
1,000
Jan-08
Jan-09
Jan-10
Jan-11
1200
170
Jan-12
Jan-13
160
1100
150
1000
Jan-08
Jan-09 Jan-10
GR
PO
Jan-11
IR
Jan-12
SP
Jan-13
IT
 Private Sector Bank Deposits
 Deposit flight is especially worrying as banks are a possible key linchpin for
contagion of a Euro crisis
 European bank run is potential risk of disorderly Greek exit
Source: BofA Merrill Lynch Global Research
22
Europe’s banking system
07 June 2013
Credit to the
nonfinancial sector
4
3
Interest rates on
corporate loans
FR
DE
IT
NL
IE
PT
ES
EA
GR
8
FR
DE
IT
ES
7
2
1
6
0
-1
5
-2
-3
-4
4
-5
-6
3
Feb/11
May/1
Aug/11
Nov/1
Feb/12
May/1
Aug/12
Nov/1
Feb/13
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Note: For rates on loans, refers to new business, maturity 1-5ys, loans up to EUR1mn
Source: BofA Merrill Lynch Global Research
23
Euro crises
07 June 2013
Europe in broad recession
Italy & Spain are the focus
10yr rate, %
% yoy
3
8
2
7
1
6
0
5
-1
2012
2013
2014
-2
4
-3
3
-4
Germany
2
Spain
-5
-6
1
-7
0
IR
AU
BE
GE
FI
FR
NE
SP
IT
PO
GR
2006
Italy
2007
2008
2009
2010
2011
2012
2013
Source: Bloomberg and BofA Merrill Lynch Global Research estimates
 Even strongest countries are rather soft
 Markets have given Spain and Italy support… for now
 Even longer-term outlook is poor
 Ireland is the “success” story
24
Short-term, long-term
07 June 2013
Soaring unemployment
%
30
100
EZ
25
k b/d, YoY
0
-100
IR
-200
PO
15
OECD Europe oil demand growth
GR
IT
20
Weak oil demand
-300
SP
-400
-500
10
-600
5
-700
-800
0
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
2006 2007 2008 2009 2010 2011 2012 2013 2014
forecast
previous forecast
Source: Bloomberg and BofA Merrill Lynch Global Research
 Debt crisis will likely continue to hit the economy
 Interaction of unemployment and weak growth with sovereign debt crisis is likely
biggest risk for Europe over medium term
 Political risk
25
Greece & Cyprus outpunches its weight
07 June 2013
Share of years in default/rescheduling
since independence/1800 up to 2008
Greece & Cyprus concerns are
well out of proportion to size
USDbn
% of y ears
60
2500
50
2000
40
1500
30
1000
20
10
0%
0%
0%
500
0
Greece
Italy
Portugal Spain
US
GE
FR
UK
(22bn)
(26bn)
Cy prus
Vermont
0
Ireland
Portugal
Greece
Spain
Italy
Source: BofA Merrill Lynch Global Research; share of years data from “This Time is
Different” by Carmen M. Reinhart and Kenneth S. Rogoff, Princeton University Press
 Greece default is not rare
 Greece, Ireland and Portugal are tiny economies; Cyprus is tinier
 Spain and Italy are a much larger problem
26
07 June 2013
Fiscal intractability
The ways out of a fiscal crisis, in general, are few
 Growth
 Inflation
 Austerity
 Default/restructuring
 “Repression”
Source: Reinhart, Carmen M. and M. Belen Sbrancia, “The Liquidation of Government Debt”,
NBER Working Paper 16893, March 2011; and BofA Merrill Lynch Global Research
27
Japan: hopes for policy
07 June 2013
2012
2013E
2014E
2013
Q1
Real GDP(% qoq)
2.0
1.7
1.7
3.5
2.4
3.7
4.1
CPI (% yoy)
-0.1
0.0
2.3
-0.3
-0.1
0.4
0.4
Policy Rate (end)
0.05
0.05
0.05
0.05
0.05
0.05
0.05
FscGovBal(%/GDP)
-8.6
-6.3
n.a.
CurActBal(%/GDP)
1.7
2.1
2.0
Japan
2013
Q2E
2013
Q3E
2013
Q4E
Source: BofA Merrill Lynch Global Research
 Expecting some recovery in Japan economy
 Also expecting likelihood of moderate inflation in 2014
 Market now focusing on BOJ action
 “Currency war”
28
Prices and policies can get stuck
07 June 2013
Long-run deflation
Rates can be zero for a long time
% yoy
%
6
9
5
Japan Core CPI
8
4
US Core CPI
7
3
6
2
5
1
4
0
3
-1
2
-2
1
-3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
0
1990
BOJ
1995
2000
Fed
2005
2010
 Japan deflation has been very confusing in both its persistence and stability
 The real short rate is higher in Japan; the zero bound is a sizable impediment
Source: Bureau of Labor Statistics and BofA Merrill Lynch Global Research
29
Japan Stagnation
07 June 2013
US v JP equities
NKY 225
40000
US v JP nominal GDP
1800
530
35000
1600
520
30000
1400
510
1200
25000
1000
20000
10000
NKY 225
S&P 500
5000
0
1980
1985
1990
1995
2000
2005
18000
16000
14000
500
490
12000
600
480
400
470
10000
Japan GDP
200
460
US GDP
0
450
800
15000
US Nominal GDP
JP Nominal GDP
S&P 500
2010
8000
6000
94 96 98 00 02 04 06 08 10 12
 Since 1980, S&P 500 up around 8% a year
 Japan has been in profound macro stagnation for a generation
Source: Bureau of Labor Statistics and BofA Merrill Lynch Global Research
30
BOJ: QQE
07 June 2013
Targeting the balance sheet
5yr inflation breakevens
Projection by
(¥tn)
BoJ
300
250
2.0
1.5
200
1.0
150
0.5
100
0.0
50
0
2000
-0.5
2002
2004
2006
2008
2010
2012
2014
1/2012
3/2012
5/2012
7/2012
9/2012
11/2012
1/2013
3/2013
5/2013
Source: Bloomberg and BofA Merrill Lynch Global Research
 Quantitative and qualitative monetary easing (QQE)
 Stronger forward guidance, with inflation goal (2%) and timeframe (2 years)
 Increasing term to maturity of JGBs purchased by BOJ
 Purchases of assets more direct; “qualitative” easing harder to pull off
31
USD-JPY: Macro reflections
07 June 2013
Weakening link to US rates
USD-JPY
130
US-JP Rate diff
Stronger to equities recently
4.5
USD-JPY
130
SP500
1700
125
1600
120
1500
115
1400
3.0
110
1300
105
2.5
105
1200
100
2.0
125
120
USD-JPY (left)
4.0
2y r US-JP spread (right)
3.5
115
110
95
1.5
90
100
1100
USD-JPY (left)
95
1000
S&P 500
90
900
1.0
85
800
80
0.5
80
700
75
0.0
75
600
85
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Source: Bloomberg and BofA Merrill Lynch Global Research
 We still see rate support for a higher USD-JPY, but over longer time
 Economy has been doing years of QE and fiscal deficits, showing difficulty in
tracing policy impacts directly to currency
32
USD-JPY: BOJ
07 June 2013
BOJ tight now
BOJ tight always
Japan: Policy rate - Taylor rule rate
Policy rate - Taylor rule rate
12.0
14.0
12.0
10.0
10.0
8.0
8.0
6.0
4.0
6.0
2.0
0.0
4.0
-2.0
-4.0
2.0
Norway
Australia
Sweden
Germany
Canada
Belgium
Austria
New Zealand
US
Netherlands
UK
Denmark
Euro
Finland
Ireland
France
Italy
Japan
Spain
Greece
Portugal
-6.0
0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Bloomberg and BofA Merrill Lynch Global Research
 “Taylor Rule” one measure of correct interest rate
 Takes monetary conditions, inflation and growth into account
 Japan is tight (note also very tight: European periphery)
33
07 June 2013
EUR support: EM demand
Reserve Accumulation still
rising, but more slowly
USDtr
10.0
Currency denomination of emerging
market foreign reserves
%
80
USD
70
9.0
EUR
60
8.0
50
7.0
40
6.0
30
5.0
20
4.0
10
3.0
0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: BofA Merrill Lynch Global Research
 EM Countries are trying to work down their high levels of USD holdings
 Such reserves have been key to drive flow diversification into EUR predominantly, also GBP
 High oil prices imply exporters selling their USD to rebalance into euro
 A key reason why EUR had maintained its strength – or lose it
34
07 June 2013
China uptrend against USD
We expect 6.05 for end-2013; 5.88 for end-2014
 China is now a crucial factor in macro and currency space
 Most importantly, macro pressures still arguing for a higher RMB
 China’s macro picture very different from US: stronger growth, some inflation
 Allowing higher RMB is both “mechanically” and economically key policy
35
China: bottoming out
Core macro outlook
GovBal (%/GDP)
-1.9
-2.3
-2.0
CurAct (%/GDP)
2.6
3.0
2.7
1.8
1.5
YoY (LHS)
4Q14
3.00
3Q14
3.00
2Q14
3.00
1Q14
Policy Rate (end)
2.0
4Q13
3.5
3Q13
2.8
2Q13
2.8
1Q13
CPI (% yoy)
2.3
3Q12
7.5
2Q12
7.6
1Q12
7.8
%QoQ
2.5
Forecast
4Q11
Real GDP (% yoy)
%YoY
10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
3Q11
2014E
2Q11
2013E
1Q11
2012E
4Q10
China
GDP
4Q12
07 June 2013
QoQ (sa, not ar, RHS)
 China’s GDP growth headed to the “new normal” below 9.0%
 There had been genuine inflation concern, although we have seen those numbers cool
 Continued tightening to fight price pressures, which RMB policy has helped grow
Source: BofA Merrill Lynch Global Research
36
Current account surplus shrinks
07 June 2013
Current account surplus
narrowing, as demand from
customers (EZ, US) weakens
US$ bn
500
Central Bank Balance sheets:
with China
80
% GDP
Forecast 12
10
400
8
300
6
200
4
100
2
0
0
1995 1997 1999 2001 2003 2005 2007 2009 2011F2013F
Current Account Balance
% GDP (RHS)
% GDP
China
70
60
50
40
Japan
30
20
ECB
10
Fed
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
 Recent increase in trading band indicates China may believe CNY is not far from
“equilibrium”
 CNY forecasts for end of year-2013 is 6.05; “fair value” closer to 5.60
 Current account has been falling, as external demand weakens
Source: Bloomberg; BofA Merrill Lynch Global Research
37
Evidence for China growth
-10
-10
0
-30
IP (RHS)
May-13
Nov-12
May-12
Nov-11
May-11
Nov-10
May-10
Nov-09
May-09
Nov-08
May-08
Nov-07
May-07
Power output
8 ports container throughput
Apr-13
5
Oct-12
0
Apr-12
10
Oct-11
10
Apr-11
30
Oct-10
15
10
Apr-10
50
Oct-09
20
Apr-09
20
Oct-08
25
Apr-06
30
%, y oy
70
Apr-08
%, yoy
Oct-07
%, yoy
Apr-07
Container port throughput vs
real export growth
Power output vs. IP growth
Oct-06
07 June 2013
Real ex port
 Consistent with weaker numbers
 However, data also point to stabilization, not deterioration
Source: Bloomberg; BofA Merrill Lynch Global Research
38
China longer term: Japan’s example
07 June 2013
Income gap with US and GDP growth in Japan
(Japan GDP growth as function of size)
GDP, y oy %
GDP growth in Japan
%
China in 2010
15.0
15.0
av g grow th: 9.3% (1956-70)
10.0
10.0
av g grow th: 4.6% (1971-90)
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
0
20
40
60
80
100
120
140
GDP capita as % of US
av g grow th: 1.0% (1991-2010)
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006
 China has roughly one-third the GDP of the US and four times the people
 Size of country (absolute or relative) is generally inversely correlated to growth
 Japan (and Korea) have followed a similar pattern
39
Mexico: outperforming MXN
07 June 2013
Mexico remains competitive
against other countries
250
200
150
Hong Kong
Indonesia
Korea
Philippines
Taiwan
Thailand
Turkey
Hungary
Poland
Portugal
Brazil
Mexico
3
Mexico
2.5
USD per hour
ULC (2003=100, USD terms)
300
Mexico overturning
China’s hourly wages
China
-19.6%
2
1.5
188.5%
1
0.5
100
0
50
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
 Long-run growth in Mexico: 3%; growth right around such levels
 MXN generally moves with oil, US growth picture, and risk sentiment; also watch elections
 USD-MXN year-end target is 12.20
Source: BofA Merrill Lynch Global Research, Banxico, INEGI, International Labor Organization, China NBS; Own estimates for China since 2009 and for
Mexico in 2013
40
G10 currency forecasts
07 June 2013
Quarterly forecasts - G10 currencies
Spot
Jun-13
G3
EUR-USD
USD-JPY
EUR-JPY
Dollar Bloc
USD-CAD
AUD-USD
NZD-USD
Europe
EUR-GBP
GBP-USD
EUR-CHF
USD-CHF
EUR-SEK
USD-SEK
EUR-NOK
USD-NOK
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
1.30
100
131
1.28
102
131
1.26
103
130
1.25
105
131
1.24
105
130
1.23
106
130
1.22
107
131
1.22
108
132
1.03
0.96
0.80
1.02
0.98
0.80
1.01
0.98
0.79
1.01
0.96
0.78
1.01
0.96
0.78
1.01
0.96
0.78
1.00
0.95
0.77
1.00
0.94
0.76
0.85
1.52
1.24
0.96
8.59
6.61
7.61
5.86
0.86
1.49
1.25
0.98
8.40
6.56
7.25
5.66
0.84
1.50
1.26
1.00
8.30
6.59
7.25
5.75
0.83
1.51
1.27
1.02
8.30
6.64
7.25
5.80
0.82
1.51
1.28
1.03
8.25
6.65
7.20
5.81
0.81
1.52
1.29
1.05
8.25
6.71
7.20
5.85
0.80
1.53
1.30
1.07
8.20
6.72
7.20
5.90
0.80
1.53
1.30
1.07
8.20
6.72
7.20
5.90
Forecast as of May-31-2013. Spot exchange rate as of May-31-2013. The left of the currency pair is the denominator of the exchange rate. Source: BofA Merrill Lynch Global Research
41
EM currency forecasts
07 June 2013
Quarterly forecasts - EM currencies
Spot
Latin America
USD-BRL
USD-MXN
USD-CLP
USD-COP
USD-ARS
USD-VEF
USD-PEN
Emerging Europe
EUR-PLN
EUR-HUF
EUR-CZK
USD-UAH
USD-RUB
USD-ZAR
USD-TRY
EUR-RON
USD-EGP
USD-ILS
USD-AED
USD-KWD
USD-SAR
USD-QAR
Asian Bloc
USD-KRW
USD-TWD
USD-SGD
USD-THB
USD-HKD
USD-CNY
USD-IDR
USD-PHP
USD-MYR
USD-INR
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
2.13
12.73
501
1,900
5.30
6.29
2.74
2.10
12.35
490
1,875
5.35
6.29
2.65
2.10
12.30
492
1,890
5.60
6.29
2.65
2.10
12.20
494
1,900
6.00
6.29
2.65
2.11
12.10
495
1,910
7.00
8.00
2.65
2.12
12.00
495
1,920
7.60
8.00
2.65
2.13
11.90
495
1,935
8.25
8.00
2.65
2.15
11.80
495
1,950
9.00
8.00
2.65
4.27
296
25.59
8.14
32.25
9.97
1.88
4.52
6.99
3.62
3.67
0.28
3.75
3.64
4.20
290
26.00
8.20
31.50
9.30
1.84
4.35
6.85
3.70
3.67
0.28
3.75
3.64
4.20
300
26.00
8.30
33.00
9.30
1.88
4.40
6.90
3.75
3.67
0.28
3.75
3.64
4.20
300
26.00
8.40
33.00
9.50
1.90
4.50
7.70
3.80
3.67
0.28
3.75
3.64
4.20
300
25.50
8.45
32.00
9.50
1.90
4.50
7.70
3.80
3.67
0.28
3.75
3.64
4.20
300
25.50
8.50
32.00
9.30
1.90
4.60
7.70
3.80
3.67
0.28
3.75
3.64
4.20
300
25.50
8.55
32.00
9.30
1.90
4.60
7.70
3.80
3.67
0.28
3.75
3.64
4.20
300
25.50
8.60
32.00
9.30
1.90
4.60
7.70
3.80
3.67
0.28
3.75
3.64
1,117
29.76
1.25
30.65
7.76
6.1332
9886
42.30
3.10
57.07
1,040
28.50
1.28
29.00
7.76
6.15
9,800
39.00
3.00
54.50
1,020
28.50
1.27
29.00
7.75
6.10
9,500
38.00
2.94
51.50
1,010
28.00
1.26
28.00
7.80
6.05
9,300
37.00
2.87
51.00
970
28.00
1.21
28.00
7.77
6.00
9,200
37.00
2.87
50.00
960
27.50
1.20
27.50
7.79
5.95
9,000
38.00
2.85
51.00
950
27.50
1.20
27.00
7.80
5.90
8,800
39.00
2.85
49.00
940
27.50
1.19
27.00
7.80
5.88
8,800
39.00
2.83
48.00
Forecast as of Jun-07-2013. Spot exchange rate as of Jun-07-2013. The left of the currency pair is the denominator of the exchange rate. Source: BofA Merrill Lynch Global Research
42
07 June 2013
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07 June 2013
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