Foreign Exchange Outlook Managing a Strong Dollar

Transcription

1 Foreign Exchange Outlook Managing a Strong Dollar Patrick B. Duong, MBA, VP Commercial Banking Capital Markets Citizens Bank Massachusetts Export Center Export Expo Dec 2015

2 Strong Dollar Impact to US Output Real Broad Trade-Weighted Exchange Value of the Dollar Estimated Effect of 10 Percent Dollar Appreciation on the US The Broad Index. Basis of 26 currencies: countries bilateral shares that exceeded 0.50% with the US in 1997 Stanley Fischer, Vice Chair of the Board of Governors of the Federal Reserve Nov 12, % appreciation in the broad dollar since July % appreciation in USD results to a fall of 3.0% in exports in 1 year; and more than 7.0% in 3 years Foreign firms will look to substitute away from the now more expensive U.S.-made goods. - Stanley Fischer 1

3 Overview Where are we now? Current Market Environment Where are we headed? Expectation How do you prepare? Best Practices AVG DAILY TRADING VOLUMES FX Market $5.3 Trillion Futures Market $437.4 Billion Equities Market $191 Billion NY Stock Exchange $28 Billion * Bank For International Settlements 2014 Global Volatility : Russian rubble RUB lost 40% 2015: Swiss franc CHF jumped 30% in less than 30 min in January 2015: Canada s CAD lowest in over 11 yrs and Australia s AUD lowest in over 6 yrs 2015: Euro dropped to a 12 year low against the dollar in March 2015: US dollar appreciated sharply by 15%, adding pressure to US exports 2

4 Fundamentals DXY Dollar Index US Dollar Index EUR Euro 57.6% JPY Japanese Yen 13.6% GBP British Pound 11.9% CAD Canadian Dollar 9.1% SEK Swedish Krona 4.2% CHF Swiss Franc 3.6% Dollar Strength Bloomberg 2015 DXY 10-Year Graph Flight to Safety Heightened concerns about the global outlook Decrease in investor risk tolerance Sharp slowdown in China and other emerging market economies Dramatic drop in oil and non-oil commodity prices Expectations for Higher Yields Demand for dollar-denominated assets US Economy is in steady progress towards full employment Foreign economies have generally experienced weak growth Foreign central banks are providing additional monetary accommodation Foreign interest rates have declined relative to US interest rates 3

5 Fundamentals Nov US Dollar vs US-10YT 10YT Yield 4.47% DXY Nov DXY Nov % Since Nov 2005 USD vs 10 Year Treasury Yields Bloomberg 2015 DXY vs 10YT Yields 10-Year Graph Generally, the USD is correlated to the US 10 Year Treasury Yield Higher yield higher demand for the dollar, vice versa activity in USD reflects recent uncertainty in the global outlook Heightened expectations of a rate increase from the FOMC meeting Dec YT Yield 2.22% Nov % Since Nov 2005

6 Expectation US-10YT December Rate Hike Probability History Bloomberg YT Yields 10-Year Graph Dec 16, 2015: Market Implied Probability rate as of Investor Demand Fed made it clear that a rate hike was possible on December th The last key data that was released on Friday was positive: NFP better than expected at 211k vs survey for 200k The market implied probability for a December rate hike is now 78% (as of Dec 09) An increase in the Fed Funds rate could increase demand for the dollar further 5

7 Impact 5 Years vs. USD CCY Country Currency 1.23% CHF Swiss Franc 4.46% GBP British Pound 6.78% SGD Singapore Dollar 8.26% TWD Taiwanese Dollar 12.24% NZD New Zealand Dollar 18.28% EUR Euro 18.35% DKK Danish Krone 19.26% SEK Swedish Krona 25.00% CAD Canadian Dollar 26.01% MXN Mexican Peso 26.06% AUD Australian Dollar 30.66% NOK Norwegian Krone 32.33% JPY Japanese Yen 52.32% ZAR South African Rand 55.38% BRL Brazilian Real US Dollar Impact 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% USD vs Major Currencies Dec 2010 to Dec 2015 CHF GBP SGD TWD NZD EUR DKK SEK CAD MXN AUD NOK JPY 1.23% 4.46% 6.78% 8.26% 12.24% 18.28% 18.35% 19.26% 25.00% 26.01% 26.06% 30.66% 32.33% ZAR BRL 52.32% 55.38% Bloomberg 2015 USD vs Major Currencies 5-Year Graph WCRS Export companies who sell products overseas are at risk despite a stronger dollar Foreign firms substitute away from the more expensive US-made goods. Expect lower purchase volumes from companies abroad 6

8 Best Practices External Be competitive in product (volume and/or quality) Be competitive on price (amount and/or terms) Provide local currency pricing for your customers This will help fixate the amount that buyers abroad need to pay you Be flexible on your dates to receive payment (expand concession for net days) Internal Best Practices Ask your bank provider about a foreign currency forward contract for your receivables This will allow your company to lock in a conversion rate for future delivery of the currency If receiving and sending in the local currency, ask your bank provider about a foreign currency account 7

9 EUR Inbound Strategy Scenario 2015 Strategy vs Non-Strategy for Jan-Nov 2015 Accounts Receivable 3mo EUR Hedge EUR/USD Rate Strategy Scenario Not Hedged Hedged Accounts receivable hedge: 3-months rolling forward contracts The EUR/USD (drk blue) was extremely volatile in 2015 Hedging strategy balances accounts receivable and has offered a gain of 1.17% YTD 8

10 Summary Recap Current Market Environment Expectations Best Practices Take Away Reach out to your banker (get a tailored strategy) Keep track of currency fluctuations (resource at table) Prepare for increased competition Patrick B. Duong Citizens Bank VP Global Markets FX 28 State Street, Boston, MA Trade Desk: Direct: Mobile: Patrick.Duong@Citizensbank.com 9

11 Resources RESOURCES Historical Exchange Rates : Stanley Fischer: The transmission of exchange rate changes to output and inflation Speech by Mr Stanley Fischer, Vice Chair of the Board of Governors of the Federal Reserve System, at the research conference Monetary Policy Implementation and Transmission in the Post-Crisis Period, sponsored by the Board of Governors of the Federal Reserve System, Washington DC, 12 November Yellen, Janet L. (2015). Inflation Dynamics and Monetary Policy, speech Philip Gamble Memorial Lecture, University of Massachusetts, Amherst, Mass. 24 September 2015 Board of Governors of the Federal Reserve System (2014). Minutes of the Federal Open Market Committee, June 17 18, 2014, press release, July 9. Loretan, Mico (2005). Indexes of the Foreign Exchange Value of the Dollar (PDF), Federal Reserve Bulletin, vol. 91 (Winter), pp

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