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FX Daily20 .pdf


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Deutsche Bank
Markets Research
Global

Foreign Exchange
FX Spot

Date
5 December 2013

FX Daily
Building the USD Bull Case for 2014
There are two building blocks to our ongoing bullish USD call for 2014.
First, US monetary policy and associated fixed income inflows. This year has been all
about pricing out QE, with the US curve bear steepening to extremes and treasury
inflows suffering as a result. Next year we think it will be all about US short-end yields
moving higher and bear flattening. Flattening has historically been exceptionally
supportive for the broad USD, as more stable long-term yields support a return of fixed
income inflows and the attractiveness of the dollar as a funding currency diminishes. Put
in other words, we don't think the Fed hikes in 2014. But just as the market front-ran the
end of QE this year even though it will happen in 2014, we think next year will all be
about short-end re-pricing even if Fed rates don't go up until 2015 (chart 1).
The second building block to our bullish USD view is our positive outlook on growth and
by extension US equity inflows. This year has stood out for record outflows from US
equities. Americans have invested record amounts offshore and foreigners have refused
to engage in the S&P 500 rally. The drivers behind this are unclear: looking across
relative P/E valuations, stock market performance and macro growth, none have proven
consistent predictors of equity flows over the last two decades and more recently. This
then leaves us with limited tools but our intuition for next year: with relative valuations
still not looking stretched, the broad dollar cheap and investors underweight US equities,
there is little reason why the US equity picture can't improve in 2014.
In terms of expressing the view, the $bloc remains the most straightforward group of
currencies to be selling: they remain over-valued on a PPP basis and flows remain
consistently vulnerable to a reversal of the post-Lehman trends. EUR/USD is tougher on
the back of what is now a well-accepted positive flow picture. We would eventually
expect the cross to crack on the back of USD strength, but looking ahead to today's ECB
meeting and as we argued last month, we will need far more than dovish commentary
from Draghi this afternoon to sustain consistent under-performance.

Market Re-Prices Much Earlier Than You Think

US Equity Outflows Have Been Big 2013 “Puzzle”

Distance between Fed repricing and actual rate hikes since 1990s
25
3
19 months
13 months
2.5
2

20

1.5
15

US 3s10s 
slope (rhs)

1
0.5
0

10

-0.5
5

Fed funds
(lhs)

-1
-1.5
-2

0
90 92 94 96 98 00 02 04 06 08 10 12 14

16

Net US equity inflows, 12mma, bn

12
8
4
0
-4
-8
-12
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

Source: Deutsche Bank, Bloomberg Finance LP

________________________________________________________________________________________________________________
Deutsche Bank AG/London


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