Macro Vision August 18, 2016

Transcription

1 Macro Vision August 18, 16 What is the weight of global factors on currency movements? Both idiosyncratic factors and global factors affect currencies' movement. In our study What explains the currencies co-movement? we showed that U.S. related developments, those linked to Europe, and finally, those connected to commodities help to explain more than half of the daily variation of 6 currencies 1. Using another approach, in this paper we identify two other factors affecting currencies: i) the (expansionary or contractionary) monetary policy stance of the Federal Reserve (Fed) and ii) risk appetite/aversion, which may be influenced, for example, by the European debt crisis or uncertainty regarding China s growth. When one of these factors changes, currencies move together. Intensity and direction (i.e., appreciation or depreciation), however, may vary. We show that much of the currencies appreciation in the first half of 16 is due to the less restrictive stance of the Fed, but the idiosyncratic factors of each country also play an important role. Which factors can affect the currencies movement? The outlook for an interest-rate hike in the U.S. makes all currencies depreciate against the U.S. dollar. When the Fed adopts (or signals) a more restrictive monetary policy, the yield of U.S. bonds increases. This attracts investors and capital flows from different countries to the U.S., strengthening the U.S. dollar. Another important factor affecting currency dynamics is related to the appetite for risky assets. When risk aversion increases, investors tend to seek higher quality assets ( flight to quality ). In this case, the U.S. dollar strengthens against most currencies, but not all. The return of U.S. Treasuries (seen as safer assets) falls, in turn, with increased demand. Therefore, when the Fed adopts a more restrictive (expansionary) monetary policy, the dollar strengthens (weakens) against other currencies and the yield of U.S. bonds rises (falls). When risk appetite decreases (increases), the dollar also strengthens (weakens), but bond yields fall (increase) (Table 1). Table 1: USD vs. Basket of currencies U.S. Treasury FED contractionary stance Risk-off We build two indexes based on the daily movement of a basket of currencies against the US dollar and the U.S. Treasuries 3 : 1 Currencies used: ZAR (South Africa), AUD (Australia), BRL (Brazil), CAD (Canada), CLP (Chile), CNY (China), COP (Colombia), EUR (euro zone), PHP (Philippines), HUF (Hungary), INR (India), IDN (Indonesia), KRW (South Korea), MYS (Malaysia), MXN (Mexico), NZD (New Zealand), PEN (Peru), PLN (Poland), CZK (Czech Republic), RUB (Russia), THB (Thailand), TRY (Turkey), JPY (Japan), GBP (United Kingdom), CHF (Switzerland) and NOK (Norway). We use the first principal component of the daily change of the 6 currencies described. Please refer to the last page of this report for important disclosures, analyst and additional information. Itaú Unibanco or its subsidiaries may do or seek to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the single factor in making their investment decision.

2 1) Fed stance index: when positive, it means that, at market prices, U.S. monetary policy has been contractionary. This happened when quantitative easing tapering was announced in May 13 and during the first interest-rate hike at the end of 15. The opposite occurred when the Fed announced the QE program (Chart 1). ) Risk aversion index: when positive, the index shows risk aversion, as in the 8 and Greek crises. When negative, the index shows risk appetite, as in the great moderation (Chart ). 3 (+) Contractionary stance; (-) Expansionary stance Chart 1: Fed Stance Index Tapering 1 Beginning of the last interest rate hike cycle 1st interest rate hike -1 Monthly Quantitative 3 month moving average easing (QE) 1 QE Chart : Risk Aversion Index 3 (+) risk-off; (-) risk-on 8 crisis Greece crisis European periphery crisis Greece crisis, China and oil prices below USD 5/barrel 1-1 Great moderation Monthly 3 month moving average What is the currencies sensitivity to each of these factors? When the Fed changes its stance or when the agents risk perception is altered, currencies move together, although intensity and direction (i.e., appreciation or depreciation) may differ. To determine the sensitivity of each currency to each of these factors, we estimate the following regression: 3 5-year Treasury. Page

3 Table 4,5 describes the estimated coefficients based on the regression above in different samples. It is worth highlighting a few interesting characteristics: (i) (ii) (iii) The beta (coefficient) in relation to a more restrictive stance of the Fed is positive for all countries; i.e., currencies lose strength against the U.S. dollar in this case. In a risk aversion scenario, all currencies depreciate against the U.S. dollar (positive coefficients), with the exception of the Japanese yen. Some currencies' coefficient in relation to risk appetite and in relation to the Fed stance has increased recently. This is the case for the Brazilian real, the Russian ruble and the Colombian peso. Table : Risk aversion Since Fed stance Risk aversion Since 1 Since 15 Fed stance Risk aversion Fed stance Developed.4%.53%.%.38%.48%.3%.37%.51%.6% Europe.45%.6%.5%.47%.49%.11%.39%.53%.1% Japan -.16%.35%.3% -.1%.3%.8% -.15%.38%.7% UK.36%.43% -.35%.36%.%.56%.39%.7% Norway.59%.66% -.4%.57%.61% -.4%.57%.63% - Switzerland.6%.65%.4%.8%.57%.1%.17%.69%.13% Australia.68%.6% -.%.57%.55% -.3%.55%.5% - New Zealand.63%.63%.%.54%.61%.5%.5%.63%.8% Canada.44%.34% -.6%.4%.33% -.1%.36%.37% -.13% Emerging.36%.31%.%.37%.35% -.%.39%.33% -.4% EM Asia.13%.11%.%.14%.13%.%.19%.1%.5% China.%.1% -.3%.3% -.7%.5% - India.16%.1% -.%.17%.%.13%.6% - Korea.%.16% -.19%.18% -.31%.1%.7% Malaysia.13%.1% -.1%.19%.17% -.34%.17% - Thailand.11%.14%.1%.14%.18%.1%.16%.18%.% Indonesia.14%.1% -.14%.11%.3%.3%.9%.4% Philippines.1%.1% -.1%.11% -.13%.6% - LATAM.37%.7% -.36%.34% -.8%.47%.39% -.13% Brazil.61%.45% -.%.54%.54% -.5%.63%.61% - Chile.33%.7% -.33%.31% -.7%.39%.31% -.5% Colombia.35%.5% -.6%.33%.31% -.%.65%.48% -.4% Mexico.48%.9% -.54%.45% -.4%.51%.4% -.9% Peru.9%.7% -.1%.8%.9% -.%.16%.14% - CEEMEA.64%.6%.1%.64%.6%.%.56%.55% -.5% Czech Republic.6%.68%.5%.6%.58%.13%.39%.53%.1% Hungary.77%.77%.5%.8%.7%.14%.5%.57%.11% Poland.73%.7%.4%.81%.71%.1%.55%.58%.9% Russia.38%.5% -.1%.49%.39% -.38%.69%.45% -.51% Turkey.57%.48%.4%.47%.47%.3%.47%.43% - South Africa.77%.69%.3%.68%.7% -.3%.73%.74% -.5% 4 We only show statistically significant coefficients at the level of 15% in the table. 5 To facilitate interpretation, we define all currencies as the price of one U.S. dollar in the currency of country i, that is, Currency/USD. Thus, a positive coefficient means that the component in question has a depreciation effect on the currency, while a negative coefficient means that the component acts to appreciate the currency. Page 3

4 Evolution of indexes and currencies in the most recent period: Following the first interest-rate hike since the 8 crisis at the end of last year, the first half of 16 was marked by a far less restrictive stance of the Fed 6 (Chart 3). The mostly negative index indicates that, in the first half of the year, the Fed s monetary policy has been interpreted by the market as more expansionist. The perception of risk by investors, in turn, has alternated between moments of risk appetite and risk aversion, despite being slightly positive (leading to depreciation) in the year due to events such as Brexit (Chart 4). 6 4 Chart 3: Fed stance index in 16 Index, sum in 5 business days 1 8 Chart 4: Risk aversion index in Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug Index, sum in 5 business days -8 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Based on the estimated coefficients (Table 1) and the evolution of the indexes (Charts 3 and 4), it is possible to determine how much of the recent movement of each currency is due to international factors and how much is due to the idiosyncratic factors. Chart 5 shows that the more expansionary stance of the Fed was the main factor behind the appreciation of most currencies in the year 7. Similar to other currencies, the Brazilian real benefited from the less restrictive stance of the Fed. Brazil's idiosyncratic factor also led to a currency appreciation, especially in recent months. The perception of declining macroeconomic risk created room for the central bank to reduce its outstanding amount of FX swaps. 6 Same index, but built on a daily basis (not monthly). 7 Exchange rates defined in the form of Currency country i/usd; i.e., positive values denote depreciation, while negative values show appreciation. Page 4

5 Chart 5- Currency movements in 16 Euro Japan From January 1 until August 1 UK Norway Switzerland Australia New Zealand Canada China India Korea Malaysia Risk aversion Fed stance Idiosyncratic Thailand Indonesia Phillipines Brazil Chile Colombia Mexico Peru Czeck Republic Hungary Poland Russia Turkey South Africa -3% -% -1% % 1% % Julia Gottlieb Referências: Gottlieb, J and Pitta, L. What explains currencies co-movement? Itaú Macro Vision 6/3/15. Page 5

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