Page 36 - STRATEGY Magazine

p g e
e
1
P
h w
strong gains in recent months
1. U.S. Policy Rate Expectations1
Sep. 16, 2015 Sep. 16, 2016 Nov. 8, 2016 Apr. 3, 2017
ncial RFigEuAreL1.E7.FRFeEalCEfTfeIcVtiEveExXcChaHngAeNRaGteEChRaAngTeEs,
lira and the Malaysian ringgit have depreciated in real effective terms, while the Indian rupee and the currencies of commodity- exporting emerging market economies—in particular, the Russian ruble—have gained. The Mexican peso has also strengthened in
olicy, long- er-term gistered
(Percent)
ons 1 s
r
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 –0.5
U.S. average 30-year (Basis points)
exporting emerging market economies—in particular, the Russian
9 Apr. 20
1,200 1,000 800 600 400 200 0
–4
17
17
6 Apr. 17
tios3 35
30
25
20
15
10 16 Apr.
this diversity—with rate hikes in Mexico and Turkey
17
ters oor’s;
this diversity—with rate hikes in Mexico and Tur
States, the e euro
ise. Data
a strong recovery so far this year after weakening
4.0
3.5
3.0
2.5
2.0
2. Policy Rate Expectations 1 (Percent; dashed lines are from the October
4.5 4.0
1.5
1.0
0.0
0.0 –0.5 The1U5.S. d16ollar,1K7ore1a8n wo1n9, TAapiwr.anes2e01d6ollar1,7and A1u8stralia19n doAlplar.r have strengthened in real effec2ti0ve terms since August, while the20 euro, and especially the Japanese yen, have weakened. The Turkish
lira and the Malaysian ringgit have depreciated in real e3ffective
6 3. Key Interest Rates2 4. Credit Spreads 1,200
1.5
1.A0ugust 2016–March 2017
CHANGES, AUGUST 2016–MARCH 2017 0.5
0.5
(Percent)
terms, while the Indian rupee and the currencies of commodity-
5 fixed-rate mortgage U.S. high grade
1,000 800
ruble—have gained. The Mexican peso has also strengthened in recent weeks and now stands little changeUd.Sr.ehliagthivyeieltdo August.
4
Source: IMF staff calculations
Euro high grade
3 8 1. Advanced Economies1 Euro high yield United States
Note: EA = euro area. Data labels in the figure use Interna- 600 tion6al Organization for Standardization (ISO) country codes.
2Latest data available is for March 31, 2017.
14 400
1 2 Germany Japan
200 –1 0
s0oug0ht to create a “soft landing” for the economic reces-
sion–2. This took the form of an expansionary monetary
poli2c0y13that1i4nclud1e5d the16maMnair.pula2t0i1o3n o1f 4inter1e5st ra1t6esApr.
Nov. 8, 2016 relative to Aug. 2016 and–6quantitative easing, both of which resulted in a low-
Latest relative to Nov. 8, 2016
er v–8aluation for the dollar. Other advanced economies3
200 5. Equity Markets 6. Price-to-Earnings Ratios 35
qu–i1c0kly(Infodlelxo,w20e0d7s=u1i0t.0;
180
United States
USA EA JPN GBR SWE CHE KOR TWN SGP CAN NOR AUS NZL
Todanya,tiotnhael cbuirgregnecsyt) players in the currency wars are
160 Japan 30
Source: IMF staff calculations.
Note: EA = euro area. Data labels in the figure use International Organization for
economies like the United States, China, Japan, the Eu-
14024 2. Emerging Market Economies1 Germany
ropean Union, and Russia. Politicians anItadly bankers from 25 12020
Standardization (ISO) country codes.
1can have a devastating impact on an economy. The famous
Washington to Moscow take turns instituting weak cur-
10016
rency policies. Since every country cannot devalue its curren-
Latest data available are for March 31, 2017.
8012 20 cy simultaneously to gain by the move, a tit-for-tat system of
East Asian crisis that tore through Thailand, Indonesia, and
60 8
neighboring nations in 1997–98 was in large part a reaction to
MSCI Emerging Market
“4c0ooperative competition” now stands in the place of a trad1i-5
the sudden depreciation of the Thai baht. During the panic,
4 Euro Stoxx S&P 500
ti2o0nal market. China orchestrated a weak yuan in 2009, the
especially in emerging Europe, but have since declined
0 TOPIX
Un0ited States devalued the dollar in 2011, Abenomics too1k0
Thailand saw its GDP drop more than 10 percent in one year
–42013 14 15 16 Mar. 2013 14 15 16 Apr.
and was forced to accept International Monetary Fund (IMF)
dow–8n the yen in 2012, and in 2014, the European Central Nov. 8, 2016 relative to Aug. 2016
funds and strict new limitations on its fiscal policy as a result. andWcuhtisleincuBrraeznil,cyInwdaiar,samndayRlueassdiat—osahsadropcdheapnrgeecsiaitnionsifthey EMtriBgIge(rEma e“rtgwining cMriasriks,e”t oBroannd eIncodneox)msipcredaodws.nturn that results
t(iFoingaulrecu1r.8r)e.nPcoyliwcyar,atae gcehnanegraesl swinecaekAenuignugst also
rates ... to gain an unfair competitive
of currency,” he said. “This threatens us
advantage over other members.” To- day, several currencies are designated as “undervalued” by the IMF. One such currency is the Korean won. South Ko- rea has surged into its role as a tech and manufacturing powerhouse over recent decades, but its currency has grown a bit slower than some might expect it to. Even so, the country’s businesses are starting to lose their competitiveness as Perhaps it is not surprising, then, that
because it takes away our competitive-
and cuts in Brazil, India, and Russia—as do chan
ness.” As an emerging economy with a
EMBI (Emerging Market Bond Index) spreads.
high export-to-GDP ratio, Brazil sits di-
8 International Monetary Fund | April 2017 Equity markets in emerging market and devel
rectly in the line of fire when an advanced
economies have strengthened since August, stagi
economy devalues its currency. And it is
not all talk—recent analyses confirm that
the immediate aftermath of the U.S. election (Fi
fiscal policies in developed countries have
ure 1.9). However, they generally remain below their
far-reaching effects on emerging econo- mpoiests-.financial-crisis peaks, reached in 2011.
the won appreciates.
the nation has a history of asymmetric foreign exchange inter- ventions and that it does not make these interventions public.
2016 WEO) 3.5
recent weeks and now stands little changed relative to August.
8 6 4 2 0
–2 –4 –6 –8
–10
24 20 16 12
8 4 0
–4
–8 –12 –16
1. Advanced Economies1
Nov. 8, 2016 relative to Aug. 2016 Latest relative to Nov. 8, 2016
USA EA JPN GBR SWE CHE KOR TWN SGP CAN NOR AUS NZL
2. Emerging Market Economies1
Nov. 8, 2016 relative to Aug. 2016 Latest relative to Nov. 8, 2016
ZAF CHN IND IDN MYS PHL THA HUN POL RUS TUR BRA CHL COL MEX PER
United States 3.0 Euro area 2.5 United Kingdom 2.0
17 17
Ba–n12k (ECB)Laintejset cretleatdivethtoeNomv. a8r, k20e1t6 with a mixture of negative
in–t1e6rest rates and quantitative easing. All this to replace that SourcesZ: ABFanCkHoNf ISNpDainID; NBlMooYmSbPeHrLg,TLH.PA.;HHUaNvePrOALnRaUlySticTsU;RThBoRmAsCoHnLRCeOutLeMrsEX PER
in a full-blown currency implosion, most
old-fashioned understanding of a healthy
Equity markets in emerging market and developing
Datastream; and IMF staff calculations.
Neoctoe:nMoSmCIy=—Mgorgoawn tShta.nley Capital International; S&P = Standard & Poor’s;
people in Guido Mantega’s shoes fear a
Source: IMF staff calculations.
economies have strengthened since August, staging
TOPIX = Tokyo Stock Price Index. The U.S. Treasury has a subtle deterioration of growth. On the Note: EA = euro area. Data labels in the figure use International Organization for a strong recovery so far this year after weakening in
1Expectations are based on the federal funds rate futures for the United States, the
flip side, “successful” currency manipu-
... BUT SOME WIN, SOME LOSE
Standardization (ISO) country codes.
sterling overnight interbank average rate for the United Kingdom,mandothneietuororing list specifically
1
ThLaetesttedramtaav“aciluabrlereanrecfyorMwaarcrh”31e,2n0t1e7r.ed the
lationcanresultinshort-termgainfor
interbank offered forward rate for the euro area; updated April 3, 2017.
ure 1 9) However they generally remain below their
2public eye following a 2010 statement by Interest rates are 10-year government bond yields, unless not
the manipulator.
ks, rIenacihtsedchinar2te0r1, 1t.he IMF affirms that
are through March 31, 2017.
Brazilian finance minister Guido Man-
3Data are through April 3, 2017.
tesgpae.ci“alWlyei’nreeminertghinegmEiudrsotpeo,fbaunt hinavtersninac-e dec
no nation should “manipulate exchange
IAt ifsewoermtherbgeinagrimngariknetmciunrdretnhcaiets chuarvreendecpyraecpipatredciation devaluation are normal—even healthy—parts of a normally
substantially in recent months—most notably the
operating exchange. When currencies “float” in the market in- stead of being pegged to gold, or at least to another (relatively stable) currency, moderate increases in value are appropriate when the economy of the nation in question grows. Without some fluctuation, the exchange market would not really be a market, but simply a list of prices. It is abrupt change that
THE UNCERTAINTIES OF TRUMP
Candidate Trump promised to have China labeled as a curren- cy manipulator. Yet by the third month of his administration, President Trump had changed his mind, perhaps taking the
34 STRATEGY
and
(Figure 1.8). Policy rate changes since August also reflect
the immediate aftermath of the U.S. election (Fig-
edgotehearwriesed.Dattoawardcurrencyma-
nipulation in countries such
lined
A few emerging mar
as China, Japan, Korea, Tai-
reflect
substantially in recent
key
land. It is safe to say, howev-
oping
nger, that the Fed has landed
wan, Germany, and Switzer-
ges in
the United States on similar
in
g-lists around the world.
..,
post-financial-crisis pea
ket currencies have depreciated
months—most notably the