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
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, 2015

15% appreciation in the broad dollar since July 2014

10% 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
Overview
AVG DAILY TRADING VOLUMES
 Where are we now?
• Current Market Environment
 Where are we headed?
• Expectation
 How do you prepare?
• Best Practices
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
 2014-2015: 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
Fundamentals
US Dollar Index
DXY Dollar Index






EUR
JPY
GBP
CAD
SEK
CHF
Euro
Japanese Yen
British Pound
Canadian Dollar
Swedish Krona
Swiss Franc
57.6%
13.6%
11.9%
9.1%
4.2%
3.6%
Dollar Strength
Bloomberg © 2015 DXY 10-Year Graph 2015-11-27
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
Fundamentals
US Dollar vs US-10YT
Nov. 2005
DXY
100.00
10YT Yield
4.47%
DXY
91.62
Nov 2015
+9.20%
Since
Nov 2005
Nov. 2005
10YT Yield
2.22%
Nov. 2015
-2.25%
Bloomberg © 2015 DXY vs 10YT Yields 10-Year Graph 2015-11-27
Since
Nov 2005
USD vs 10 Year Treasury Yields




Generally, the USD is correlated to the US 10 Year Treasury Yield
Higher yield – higher demand for the dollar, vice versa
2014-2015 activity in USD reflects recent uncertainty in the global outlook
Heightened expectations of a rate increase from the FOMC meeting Dec 15-16
4
Expectation
December Rate Hike Probability History
US-10YT
Bloomberg © 2015 10YT Yields 10-Year Graph 2015-11-30
Dec 16, 2015: Market Implied Probability rate as of 2015-12-07
Investor Demand
 Fed made it clear that a rate hike was possible on December 15-16th
 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
Impact
5 Years vs. USD CCY
‐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%
‐52.32%
‐55.38%
CHF
GBP
SGD
TWD
NZD
EUR
DKK
SEK
CAD
MXN
AUD
NOK
JPY
ZAR
BRL
US Dollar Impact
Country Currency
Swiss Franc
British Pound
Singapore Dollar
Taiwanese Dollar
New Zealand Dollar
Euro
Danish Krone
Swedish Krona
Canadian Dollar
Mexican Peso
Australian Dollar
Norwegian Krone
Japanese Yen
South African Rand
Brazilian Real
USD vs Major Currencies Dec 2010 to Dec 2015
CHF GBP SGD TWD NZD EUR DKK SEK CAD MXN AUD NOK JPY ZAR BRL
0.00%
‐1.23%
‐4.46%
‐6.78%
‐10.00%
‐8.26%
‐12.24%
‐20.00%
‐18.28%
‐18.35%
‐19.26%
‐25.00%
‐26.01%
‐26.06%
‐30.66%
‐32.33%
‐30.00%
‐40.00%
‐50.00%
‐52.32%
‐55.38%
‐60.00%
Bloomberg © 2015 USD vs Major Currencies 5-Year Graph WCRS 2015-12-07
 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
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 30-60-90-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
EUR Inbound Strategy Scenario 2015
Strategy vs Non-Strategy for Jan-Nov 2015
Accounts Receivable 3mo EUR Hedge
EUR/USD Rate
1.1400
1.1200
1.1000
1.0800
1.0600
1.0400
1
2
3
4
5
6
7
8
9
10
11
Not Hedged 1.1291 1.1196 1.0731 1.1224 1.0986 1.1147 1.0984 1.1211 1.1177 1.1006 1.0565
Hedged
1.1291 1.1296 1.1302 1.1309 1.1231 1.1240 1.1250 1.0992 1.1001 1.1012 1.1013
Strategy Scenario
 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
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 02109
Trade Desk: 888 821 3600 | Direct: 617 994 7049 | Mobile: 617 858 1835
[email protected] | www.citizensbank.com
9
Resources
RESOURCES
•
Historical Exchange Rates : http://www.federalreserve.gov/releases/h10/hist/
•
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 2015.
•
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. 1–8.
10
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