Currency Wars and QE2: the implications for global investing

Private Wealth ManagementDeutsche Bank

Currency Wars and QE2: the implications for global investing

Marshall GittlerChief Strategist, EMEAPlace des Bergues 3CH-1211 Geneve [email protected]+41 (0) 22 739 0463

December, 2010

Private Wealth ManagementDeutsche Bank Marshall Gittler

Israel Business Conference 2010 2

Hyperinflation

Currency Wars and QE2 How to fix the global imbalances?

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Hyperinflation Deflation— Bond yields fall; yield curve flattens

— Risk premium declines

— Yield spreads with corporate bonds compress

— Stocks rise; wealth effect boosts spending

— Currency declines, exports pick up, economy recovers

Currency wars and QE2 The theoretical impact of QE



Currency wars and QE2 Actual impact of QE2: buy the rumor, sell the fact

Hyperinflation Deflation

Source: Bloomberg Financial LP, Deutsche Bank Global Investment Solutions

2yr/10yr curve has steepened since Fed began QE2

Fed announces rollover of MBS into Treasuries

Fed hints at QE2 at Jackson Hole

Formal announcement



Currency wars and QE2 Same pattern occurred in Japan at first



10yr yields eventually got down to the lowest level in history



Currency Wars and QE2 Actual impact of QE2: supporting equities

Hyperinflation


US stocks responded to Fed’s QE 1.0 & expectations of 2.0



Currency Wars and QE2 Actual impact of QE2: Currency weakened in advance



QE2 has weakened USD vs majors more than EM currencies



Currency Wars and QE2 Risks of QE: USD collapse?





Currency Wars and QE2 Risks of QE: commodity bubble?





Currency Wars and QE2 Risks of QE: global bubble?



Did Japan’s QE ignite a global bubble? If so, what might 3 CBs QE do?



Currency Wars and QE2 Lower risk premium = search for yield

Hyperinflation Deflation— QE to force investors into riskier assets— Money likely to flow to countries with:

— a less expansionary monetary policies (e.g., Eurozone, Switzerland or EM countries);

— higher interest rates (e.g. the EM countries); and — higher expected growth rates (e.g., EM countries)



Currency Wars and QE2 EM bonds: not yet in bubble territory


Source: Bloomberg Financial LP, Deutsche Bank Global Investment Solutions. Data as of 6 Dec 2010.

EM bonds generally have higher nominal & real yields than DM bonds



Currency Wars and QE2 Other carry trades: DM credit, high-yielding equities

Hyperinflation Deflation— Keeping rates low for long should encourage carry trades— We recommend:

— FX carry trades— Corporate bonds— Equities with a substantial likelihood of high

paybacks— Real estate & REITs



Source: T.R.Datastream, Deutsche Bank Global Investment Solutions; Data: Jan. 1971 to Apr. 2010

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

-4 -3 -2 -1 0 1 2 3 4 5 6 7 8

Gold (% yoy)

Real Fed Funds Rate (%)

Change in gold price during different real Fed Funds rate regimes

Currency Wars and QE2 Gold benefits from a low real rate environment



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Currency Wars and QE2: the implications for global investing

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