Macro Perspectives on FX – Risk Appetite Not The Only Dollar Driver

47 Pages·2009·1.26 MB·English

See the Disclosure Appendix
Macro Perspectives on FX –
Risk Appetite Not The Only Dollar
Driver
Jeremy Hale
Managing Director
[phone]
[email protected]
The ECB, 8 September 2009
Citigroup Global Markets Limited
Risk “On – Off” Driving F/X and
Other Markets
Risk Link With US Dollar Likely to Wane
1.60 10 1.6 0
10
1.55 20 1.5
20
1.50 30 1.4
30
1.45 40 1.3
40
SD nt SD nt
EUR/U1.40 50Perce EUR/U1.2 50Perce
1.35 60 1.1
60
1.30 70 1.0
70
1.25 80 0.9
80
1.20 90 0.8 90
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep 90 92 94 96 98 00 02 04 06 08
08 09
CBOE, Volatility Index (VIX), USD Spot Rates, EUR/USD CBOE, Volatility Index (VIX), USD Spot Rates, EUR/USD
Source: Reuters EcoWin
-3-
USD Decline Defies Rate Differentials
2.25 1.60 1.50 1.500
1.475
2.00 1.25
1.55
1.450
1.75 1.00
1.50
1.425
1.50 0.75
1.400
1.45
1.25 0.50 1.375
nt SD nt SD
Perce1.00 1.40EUR/U Perce 0.25 1.350EUR/U
1.35
1.325
0.75 0.00
1.300
1.30
0.50 -0.25
1.275
1.25
0.25 -0.50
1.250
0.00 1.20 -0.75 1.225
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
08 09 08 09
EUR/USD, Close € 2y Swaps Less US$ 2y Swaps EUR/USD, Close Euro Less USD 10y Swap Rates
Source: Reuters EcoWin
-4-
US Equities and USD Influences Have Been
Greater Than in Previous Cycles
Correlation Coefficients of Monthly % Changes Between
Commodity Prices And Market Drivers
WTI Alum. Copper Lead Nickel Tin Zinc Gold Silver Wheat Corn Soybeans Soybean Oil
8/1997 to 7/2008 -2.9% 15.0% 15.6% 14.3% 19.6% 11.0% 17.4% -7.9% 6.3% -3.0% -2.8% 6.3% 6.6%
S&P500
7/2008 to 7/2009 40.8% 55.1% 60.5% 42.0% 72.0% 47.3% 62.0% -6.7% 17.9% 58.1% 47.4% 56.5% 63.6%
8/1997 to 7/2008 -10.0% -25.4% -18.8% -16.7% -17.6% -17.2% -13.4% -42.9% -24.5% -12.7% -7.5% -13.4% -21.8%
USD*
7/2008 to 7/2009 -41.8% -47.5% -42.5% -24.9% -48.2% -32.6% -55.3% -53.5% -59.8% -63.3% -58.7% -55.7% -62.3%
Net Investor 8/1997 to 7/2008 19.5% n/a n/a n/a n/a n/a n/a 13.8% 7.8% 16.5% 12.4% 12.4% 11.3%
Positioning** 7/2008 to 7/2009 22.4% n/a n/a n/a n/a n/a n/a 69.9% 72.2% -11.6% 24.7% 47.9% 18.5%
* Nominal USD index versus six major world currencies. Bloomberg code: DXY.
** CFTC data long minus short non-commercial positions.
Sources: Citi and Bloomberg
-5-
Positioning Suggests Risk Rally
Will Extend
Long Short Equity HF Returns Suggest Limited
Participation in the Rally Until Recently
1500 1800
0.80
1400 1600 0.70
0.60
1300 1400 0.50
0.40
1200 1200
0.30
0.20
1100 1000
1m rolling beta of weekly returns
0.10
0.00
1000 800
-0.10
900 600 -0.20
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
HFRX Equity Hedge Index S&P 500
In 2008, returns to the HFR Equity Hedge index were -26%
versus -39% for the S&P 500. Since the 9 March 2009
Sources: HFR, Bloomberg and Citi
low, returns were 11% and 47% respectively
-7-
Macro Funds: Missed Risk Rally?
1600 0.00
1500 0.20
1400 0.40
1300 0.60
1200 0.80
1100 1.00
HFRX Macro Index
Citi MRI (inverted rhs)
1000 1.20
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
Sources: HFR, Bloomberg and Citi
Note: The Citi Macro Risk Index measures risk aversion in globalfinancial markets. It is an equally weighted index of emerging market sovereign spreads,
US credit spreads, US swap spreads and implied FX, equity and swap rate volatility. The index is bound between 0 (low risk aversion) and 1 (high risk aversion)
-8-
Investor Sentiment
80 1800
AAII Bull less Bear Index
S&P 500 1600
60
1400
40
1200
20
1000
(
800
0
600
-20
400
-40
200
Latest Reading = Zero
-60 0
Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Sources: ICI, AAII, Bloomberg and Citi
-9-
Turn In Cycle Also Helps Risk
Assets