SEPTEMBER 2019 FXMONTHLY - q-cam.com · Uncertainty tops interest rates QCAM Insight ++ The macro...
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Uncertainty tops interest rates
QCAM Insight ++ The macro perspective ++ FX market talk
Economic activity ++ Inflation ++ FX markets ++ Financial markets
Number of the month
SEPTEMBER 2019
FX MONTHLY
Page 1 QCAM Insight
Swiss economy on shaky ground
Page 3 The macro perspective
Sterling’s history has something to tell us
Page 5 FX market talk
Wellershoff & Partners Ltd. is a strategic research partner of QCAM Currency Asset Management AG. This includes the regular exchange on fundamental developments in the global economy and on financial markets as well as their influence on currency markets. What is more, Wellershoff & Partners Ltd. is available to QCAM Cur-rency Asset Management AG for selected events as well as client meetings.
ImprintContent, concept, and layout:QCAM Currency Asset Management AG, Zug, and Wellershoff & Partners Ltd., Zürich Editorial deadline: September 6, 2019FX Monthly is published monthly in English and German.
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Wellershoff & Partners Ltd.Zürichbergstrasse 388044 ZürichSwitzerland
QCAM Insight Page 1
The macro perspective Page 3
FX market talk Page 5
Economic activity Page 7
Inflation Page 11
FX markets Page 15
Financial markets Page 19
Number of the month Page 21
FX Monthly September 2019
Contents
1 | FX Monthly
QCAM Insight
Uncertainty tops interest rates
Uncertainty waxed in August and so did USD, despite
tighter interest rate spreads. If the Fed were to cut
interest rates just as uncertainties subside, we think
USD looks vulnerable.
In last month’s issue of FX Monthly we said that uncer-
tainty would likely remain high this year. In August, in fact,
it increased. The reasons were several: the US-China trade
war escalated, the risk of a hard Brexit increased, Italy’s
government disintegrated, Hong Kong’s demonstrations
turned ugly, tensions ratcheted up in the Strait of Hormuz,
the Amazon’s forests were in flames and Argentina de-
faulted, just to cite some lowlights.
The rising tide of uncertainty shook financial markets.
Equities plunged in early August and have since moved in
a volatile range. The VIX volatility index, the benchmark
of uncertainty, jumped from 13 index points in July to 19
in August. And government bond yields fell sharply—the
yield of 10-year US Treasuries fell by around 50 bps, to
1.5 percent.
On currency markets, USD was the big winner in Au-
gust as the USD index (DXY) gained nearly 1 percent. Over
the month, emerging market currencies lost around 3 per-
cent versus USD. Argentina’s peso plummeted, down
roughly 25 percent. At the same time, USD appreciated
against most major currencies, except JPY, benefitting from
the closing of short-yen carry positions due to the increas-
ing uncertainty. The Swiss National Bank intervened to stop
CHF’s ascent, which otherwise would have risen higher, in
step with rising uncertainty.
Out of sync with interest rates
We think it’s interesting to look at USD’s FX performance
compared to its interest rate spread versus other curren-
cies over the most recent quarter (see chart). In June, the
spread of US interest rates versus other currencies tight-
ened as speculation of a Fed rate cut increased. Unsur-
prisingly, USD weakened against other major currencies,
except AUD, which widened after Australia’s central bank
earlier interest rate cut. That said, even AUD rose versus
USD, pulled upward by the other currencies.
In July, the spread largely stabilized as the Fed cooled
rate-cut expectations. On cue, USD appreciated against all
major currencies. In August, it tightened again, reacting to
renewed speculation about coming rate cuts. It would be
logical, based on June’s experience, that USD would then
depreciate. It did not, as rising uncertainty drove USD high-
er against the majors (excluding JPY, discussed above).
Bernhard Eschweiler, PhD, Senior Economist
QCAM Currency Asset Management AG
FX Monthly | 2
Jitters abate
We will say it again: We see nothing to change our view
that uncertainty is likely to remain elevated for the bal-
ance of this year. On the way, we think August might prove
to be a good example of peak anxiety from the simultane-
ous intensification of several very fraught, not to say, in-
cendiary, politically-driven issues. The trade conflict be-
tween the US and China isn’t over but its burden on the
US economy may compel president Trump to sue for peace.
A hard Brexit remains a significant risk but recent politi-
cal developments have lowered it for now. Meanwhile, It-
aly’s government crisis seems to have passed, for now, and
the Hong Kong government seems to be making serious
efforts to appease demonstrators. Last, not least, diplo-
macy has resumed with Iran. Some good news to calm
market jitters.
What about interest rates?
On the other hand, the prospect of lower interest rates
has by no means vanished. The Fed, the ECB and the BoJ
are all expected to trim rates in September, and most oth-
er major central banks will probably follow suit. The ques-
tion is, who will cut the deepest? The Fed has more lee-
way than most, but will it use it? The pressure to do so is
not overwhelming based on US economic performance
so far this year. But the Fed may feel compelled to provide
some more fuel to the US economy, given the palpable
negative effects of trade conflicts on manufacturing, and
the softness evident in the economies of much of the rest
of the world as well.
It is impossible to predict how today’s many moving
parts will play out. However, we think it is not unreason-
able to see an outcome in which USD loses its edge as 1)
uncertainty eases off its recent peak, and 2) the US inter-
est rate advantage declines further. After all, USD is plain-
ly overvalued on a purchasing power parity basis and
America’s vast twin deficits remain.
EUR
JPYGBP
CHFCAD
AUD
EUR
JPY
GBP
CHF
CAD
AUDEUR
JPY
GBP
CHF
CAD
AUD
−50
5Ex
chan
ge ra
te c
hang
e ve
rsus
USD
, in
% (+
= g
ain)
−20 −10 0 10 20Change in 3−months swap rates versus USD, in basis points (+ = tighter)
June
July
August
Interest and exchange rates changes versus USD
Source: Bank of Japan, QCAM Currency Asset Management
3 | FX Monthly
The slowdown in the global economy has not halted at
Switzerland’s borders. Swiss companies are lately
showing particular caution when investing. The health
sector continues to boom. On the one hand, this ben-
efits the sector’s value creation in Switzerland, and on
the other, the pharmaceutical sector, whose exports
continue their strong momentum.
Some political conflicts that have been threatening to de-
rail the global economy have eased a bit in recent weeks.
But this does not blunt the fact that the list of potentially
destabilizing risks is still very long. Many current political
dramas are characterized by an almost daily back and
forth, with the media and markets straining to keep up.
This applies to the trade conflict between China and the
US, the ongoing turmoil around Brexit, and also the dem-
onstrations in Hong Kong. After few signs of tensions
slackening there, the local government now seems to be
responding to some of the demonstrators’ demands. But
the conflict still appears to be far from finding resolution.
Uncertainties about the economic outlook stemming
from political risks are increasingly visible in the senti-
ment data of industrial companies in the US. In the Euro-
zone, corporate sentiment also declined sharply last year.
Although there was some stabilization in August, it took
place at a low level. Surprisingly, other sectors of the econ-
omy have been unimpressed by industry’s slump – but this
seems to be changing now too. Both in the US and in the
Eurozone, consumer sentiment declined in August, al-
though remaining at high levels in both regions.
Switzerland can’t escape the gloom
Globally, economic growth since the beginning of the year
has been below the long-term trend, and Switzerland is
not immune to the prevailing weakness. According to a
preliminary estimate, growth in the second quarter of
2019 compared to the first was a mere 0.3 percent. Equip-
ment investment was very weak, at -1.0 percent, reflect-
ing the uncertainty companies feel about future econom-
ic developments. After a strong start to the year thanks
to mild winter, the value added in the construction sector
grew only weakly lately. Consumption growth also re-
mained below average and thus, given the growing popu-
lation, still modest.
The Swiss economy’s projected annual growth rate of
0.3% is very low. This is also due to a special factor that
distorts Swiss GDP estimates: sports economics. Many
important international sports organizations have their
headquarters in Switzerland, and major events such as the
FIFA World Cup and the Olympic Games have a clearly
visible effect on Swiss GDP. As a result, growth was over-
estimated in the first half of 2018, while in the second half
growth was particularly poor due to a lack of big global
sporting events. As a result, the State Secretariat for Eco-
nomic Affairs no longer only publishes seasonally adjust-
ed data, but also data with a «sports event adjustment.»
Excluding these events from GDP calculations, growth was
0.9 percent compared to the same quarter last year.
Individual sectors support growth
With or without big sports events, the Swiss economy is
only growing slowly. That Switzerland has not yet slipped
Swiss economy on shaky grounds
The macro perspective
FX Monthly | 4
Swiss economy on shaky grounds into recession is due to the high demand from health sec-
tor. This can be seen in the domestic economy, where val-
ue creation in the health sector continues to grow dynam-
ically. On the other hand, Swiss industry is also well
prepared for this megatrend. At just over 5 percent of the
total wealth creation of the Swiss economy, the pharma-
ceutical industry is now by far the largest industrial sec-
tor. Pharmaceutical exports remained strong, and these
exports are not only less cyclical in nature but also less
dependent on exchange rate movements. The recent ap-
preciation of the franc should therefore have little impact
on the development of this sector.
SNB faces difficult decisions
As there are currently only a few sectors in Switzerland
with positive growth momentum, the Swiss National Bank
faces some difficult decisions. With no alternatives avail-
able, support for the sluggish economy primarily comes
in the form of currency interventions. But are these in-
terventions really useful if the export sector is relatively
robust thanks to the strong pharmaceutical industry? The
interventions this summer suggest that the SNB still be-
lieves in the benefits of currency market interventions, at
least for the time being.
−4
−2
0
2
4
6
Annu
al g
row
th ra
tes,
in %
1995 2000 2005 2010 2015
Real GDPW&P ESI (fitted)W&P trend growth
Weak growth in Switzerland
Source: Thomson Reuters Datastream, Wellershoff & Partners
5 | FX Monthly
The British pound continues to be buffeted by power-
ful political and economic forces that have pushed the
currency far into undervalued territory. But, we note,
there have been times, not even so very long ago,
when Sterling was cheaper still – and even more vol-
atile. In 1985 the pound touched its 288-year low of
1.04 against the US dollar, only to bounce back sharp-
ly later that year. So, we’ve seen this movie before.
The story has always been that Sterling eventually re-
turns to fair value. But when?
The political backdrop to Sterling’s decline in 1985 was
messy, and there are some notable similarities to today’s
uncertain environment. In the US in ‘85 there was talk of
tariffs to protect domestic manufacturing. And the larger
political world looked rather shaky, too. Two superpow-
ers were engaged in a frightening arms race and terrorist
incidents in Europe and Asia set the world’s nerves on
edge. Then as now, the US dollar was plainly expensive
against a range of currencies.
Starting at the beginning
In 1791, when trading began between Great Britain and
its united former colonies in America, the price of one
pound Sterling was USD 4.55. From that level, Sterling
has steadily become cheaper against the dollar, on aver-
age by just over one US cent per year. The three-century
trend, therefore, has clearly been downward. But there
have also been periods of unexpected reversals. In 1864,
as the American Civil War raged, it looked like the United
States would break apart. In that year, Americans were
prepared to pay USD 9.97 to buy one pound Sterling. By
the start of the Second World War, in 1939, the pound
was trading at the same level as it had in 1791. In other
words, the bulk of Sterling’s weakness against the US dol-
lar is a post-World War Two phenomenon. Despite that
costly war, Churchill captured Britain’s world view in a
speech in Zurich in 1946 where he called for «building a
kind of United States of Europe.» But, for the record, he
did not see the UK as part of this project. Britain was dif-
ferent. After all, it still had its Empire.
Fast-forward to 2019
Britain wants out of the European project. Free trade
agreements with its former colonies, including Canada,
the United States, India and Australia, have a powerful ap-
peal. But the negotiations will not be quick or easy.
What this all means for Sterling’s outlook depends on
how the many moving parts of this story fit or fail to fit to-
gether under several different assumptions. But one ma-
jor assumption has to be that the UK is likely to continue
to have higher average inflation than the US, the Euro-
zone, Switzerland or Japan. This would speak for Sterling’s
purchasing power parity differential to gradually weaken
against the currencies of those economies.
The current Sterling discount
Sterling is cheap today. While we cannot predict its near-
term path, we do know that too wide a gap between a cur-
rency’s spot price and its purchasing power parity is un-
sustainable, as shown in the chart. This is because too
large a gap creates all kinds of arbitrage opportunities. At
Sterling’s history has something to tell us
FX market talk
FX Monthly | 6
the same time, we know that large deviations from pur-
chasing power parity can persist for extended periods of
time, as the chart also shows.
The current phase of Sterling weakness reflects uncer-
tainties on a wide range of issues that are impossible to ac-
curately price at this point. Previously unthinkable notions,
such as the possibility of the dissolution of the United King-
dom, now sound a bit less preposterous. Scotland and Eng-
land have been joined a union since 1707 – long before the
United States was founded. But Brexit is fundamentally
challenging that historical relationship.
Scenarios where Scotland could choose independence
and join the EU on its own or that Northern Ireland might
opt to unite with Ireland simply are not standard inputs for
FX models. If those break-ups were similar to the “velvet
revolution,” when Czechoslovakia chose to dissolve peace-
fully into the Czech Republic and Slovakia, then Sterling
might be well served. But there is also a plausible scenario
where the break-up proves to be very costly to England.
For example, if Scotland were to reject paying its full share
of the UK government’s debt and contingent liabilities, the
UK’s debt burden would be staggering.
At the other end of the spectrum, we still cannot exclude
the scenario of the British people ultimately deciding not
to leave the EU. That development would clearly be posi-
tive for Sterling.
The current opposition favors policies that aim to dis-
tribute wealth to a far greater extent than the UK has wit-
nessed in recent decades. This possibility alone enhances
the appeal of diversifying out of Sterling and for some or-
ganizations even to end all operations in the UK. No longer
in the EU and no longer subject to its Maastricht Treaty
limits on government debt, a future UK government would
be able to decide its own borrowing limits.
To conclude, Sterling is clearly cheap today relative to
its purchasing power parity but the scenarios for the fu-
ture of the UK could hardly be more extreme. History re-
minds us that even at today’s cheap levels, in a adverse
scenario Sterling could become cheaper still, as we saw
in 1985.
1.00
1.50
2.00
2.50
1985 1990 1995 2000 2005 2010 2015 2020
GBPUSDGBPUSD PPPNeutral Territory
The Sterling discount has been larger before
Source: Thomson Reuters Datastream, Wellershoff & Partners
US fell below the 50-point threshold, pointing to a de-
cline in industrial production. Despite this alarming
prospect, our outlook for the US has not fundamental-
ly changed. Historically, ISM Manufacturing surveys
have proven unreliable harbingers of recessions, and in
August the indicator for service sectors was surprising-
ly positive. So, while we expect a slowdown in growth
in the US, we do not foresee an imminent recession.
Compared to the first quarter, the Eurozone grew by
only 0.2 percent in the second quarter of this year, half
the growth rate it achieved in the first quarter. Germa-
ny was the Eurozone’s laggard, delivering slightly nega-
tive growth. This was mainly due to weakness in exports,
which fell by 8 percent in the second quarter. Sentiment
indicators had long anticipated this slump in manufac-
turing. But after falling steeply for more than a year in
both Germany and in the Eurozone as a whole, senti-
ment stabilized in August, albeit at a low level.
For the first time since 2016, the closely watched
ISM Manufacturing Index for industrial sentiment in the
Economic activity
Trend growth1
Real GDP growth2 W&P economic sentiment indicators3
Q3/2018 Q4/2018 Q1/2019 Q2/2019 5/2019 6/2019 7/2019 8/2019
United States 1.7 3.1 2.5 2.7 2.3 2.8 2.5 2.4 2.3
Eurozone 1.0 1.7 1.2 1.2 1.1 2.1 1.8 1.8 1.8
Germany 1.4 1.1 0.6 0.9 0.4 2.2 1.8 1.4 1.4
France 0.7 1.5 1.2 1.3 1.4 1.9 1.8 1.8 1.8
Italy 0.2 0.5 0.0 -0.1 -0.1 0.7 0.5 0.7 0.6
Spain 1.6 2.5 2.3 2.4 2.3 2.5 2.4 2.5 2.7
United Kingdom 1.8 1.6 1.4 1.8 1.2 1.1 1.1 1.0 0.8
Switzerland 1.5 2.5 1.4 1.0 0.3 1.8 1.6 1.2 1.4
Japan 0.4 0.2 0.3 1.0 1.1 1.8 1.7 1.6 1.6
Canada 1.6 2.0 1.6 1.4 1.6 1.1 1.6 1.6 1.8
Australia 2.4 2.6 2.2 1.7 1.4 2.7 2.7 2.6 2.6
Brazil 1.4 1.3 1.1 0.5 1.0 1.0 1.1 1.6 –
Russia 0.1 2.2 2.7 0.5 0.9 0.0 -1.1 -0.5 -0.6
India 7.7 7.0 6.6 5.8 5.0 6.7 6.6 6.6 6.5
China 7.4 6.5 6.4 6.4 6.2 6.3 5.9 6.1 6.4
Advanced economies4 1.4 2.3 1.8 1.9 1.8 2.4 2.2 2.1 2.0
Emerging economies4 6.0 5.3 4.9 4.5 4.4 4.6 4.3 4.5 4.5
World economy4 3.5 3.8 3.4 3.3 3.2 3.5 3.2 3.3 3.2
1 Current year-on-year trend growth rate of real GDP, in percent, according to the proprietary trend growth model of Wellershoff & Partners.2 Year-on-year growth rate, in percent.3 Wellershoff & Partners economic sentiment indicators are based on consumer and business surveys and have up to 6 months lead
on the year-on-year growth rate of real GDP.4 Calculations are based on nominal GDP weights derived from purchasing power parity exchange rates.
Source: European Commission, Penn World Table, Thomson Reuters Datastream, Wellershoff & Partners
Growth overview
7 | FX Monthly
Source: Thomson Reuters Datastream, Wellershoff & Partners
−15
−10
−5
0
5
10
15
20
chan
ge y
oy in
per
cent
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Brazil Russia India China
Economic growth in emerging economies
−10
−8
−6
−4
−2
0
2
4
6
8
chan
ge y
oy in
per
cent
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
USA Eurozone UK Switzerland Japan
Economic growth in advanced economies
FX Monthly | 8
Global GDP share1 Current account2 Public debt2 Budget deficit2 Unemployment rate3
Ø 5 years Current Ø 5 years Current Ø 5 years Current Ø 5 years Current Ø 5 years Current
United States 24.0 24.5 -2.3 -2.4 105.7 110.3 -5.3 -6.6 4.9 3.7
Eurozone 16.1 15.6 3.8 – 109.2 – -1.8 – 10.0 7.5
Germany 4.7 4.5 7.9 7.3 76.2 66.5 1.0 0.9 6.0 5.0
France 3.3 3.2 -0.6 0.0 121.8 124.1 -3.3 -3.2 9.5 8.2
Italy 2.5 2.3 2.3 2.6 155.5 151.0 -2.5 -2.4 11.6 9.9
Spain 1.7 1.6 1.5 0.8 115.9 113.0 -4.3 -2.0 19.7 13.9
United Kingdom 3.6 3.2 -4.5 -5.6 113.7 112.4 -3.2 -2.1 4.7 3.2
Switzerland 0.9 0.8 9.2 9.6 42.7 40.3 0.7 1.4 3.1 2.1
Japan 6.1 5.9 3.1 3.0 220.8 225.6 -3.6 -2.5 3.1 2.2
Canada 2.1 2.0 -2.9 -3.1 89.9 88.0 -0.2 -0.6 6.6 5.7
Australia 1.7 1.6 -3.1 -2.1 38.7 41.1 -2.2 -1.5 5.7 5.2
China 14.8 16.3 1.7 0.4 44.5 55.4 -3.2 -6.1 4.0 –
Brazil 2.5 2.2 -1.9 -1.7 77.0 90.4 -7.9 -7.3 10.3 11.8
India 3.0 3.4 -1.5 -2.5 69.3 69.0 -7.0 -6.9 – –
Russia 2.0 1.8 3.8 5.7 15.6 13.8 -1.4 1.0 5.3 4.4
Source: Thomson Reuters Datastream, Wellershoff & Partners
−15
−10
−5
0
5
in p
erce
nt o
f GD
P
2002 2004 2006 2008 2010 2012 2014 2016 2018
USA Eurozone UK Switzerland Japan
Budget deficits in advanced economies
Economic indicators
1 In percent; calculations based on market exchange rates. 2 In percent of nominal GDP. 3 In percent.
Overview
9 | FX Monthly
Source: Thomson Reuters Datastream, Wellershoff & Partners
0
20
40
60
80
100
in p
erce
nt o
f GD
P
2002 2004 2006 2008 2010 2012 2014 2016 2018
Brazil Russia India China
Public debt in emerging economies
0
50
100
150
200
250
in p
erce
nt o
f GD
P
2002 2004 2006 2008 2010 2012 2014 2016 2018
USA Eurozone UK Switzerland Japan
Public debt in advanced economies
FX Monthly | 10
not managed to change inflation expectations. The BoJ
in any case is still very far from reaching its two-percent
inflation target.
Argentina is struggling with the opposite problem—
too high a rate of inflation. The victory of the opposition
left-wing candidate in the primaries alarmed currency
markets and sent the peso tumbling. Already in 2018, in-
flation increased in Argentina by almost 50 percent. For
this year, the government has estimated inflation increas-
ing by a rate of about 23 percent. However, faced with
rising import prices as the peso tumbles, we expect a
higher inflation rate than the government’s forecast.
The Bank of Japan continues to make slow progress in its
struggle to boost the country’s low inflation rate. After
adjusting for particularly volatile goods, core inflation in
Japan stood at zero percent in 2017. Thanks to the BoJ’s
sustained efforts, it has steadily risen since then, climb-
ing to 0.6 percent most recently. However, this remains
a modest advance in the context of a well-utilized labor
market. As ever, the inflation expectations of economic
actors – companies and consumers – play an important
role in the development of inflation. Today, low inflation
expectations are deeply anchored in Japan. And so far,
the many measures undertaken by the central bank have
Inflation
Ø 10 years1 Inflation2 Core inflation3
2/2019 3/2019 4/2019 5/2019 2/2019 3/2019 4/2019 5/2019
United States 1.7 1.8 1.6 1.8 – 2.0 2.1 2.2 –
Eurozone 1.3 1.2 1.3 1.0 1.0 0.8 1.1 0.9 0.9
Germany 1.3 1.4 1.6 1.7 1.4 1.4 1.4 1.5 –
France 1.1 0.9 1.2 1.1 1.0 0.5 0.9 0.9 –
Italy 1.2 0.8 0.7 0.4 0.5 0.4 0.4 0.5 0.6
Spain 1.2 0.8 0.4 0.5 0.3 0.7 0.9 0.9 –
United Kingdom 2.2 2.0 2.0 2.1 – 1.7 1.8 1.9 –
Switzerland 0.0 0.6 0.6 0.3 0.3 0.6 0.7 0.4 0.4
Japan 0.4 0.8 0.7 0.6 – 0.5 0.6 0.6 –
Canada 1.7 2.4 2.0 2.0 – 2.0 2.0 2.0 –
Australia 2.1 1.5 1.6 – – 1.4 1.5 – –
Brazil 5.9 4.7 3.4 3.2 3.4 3.9 3.6 3.3 –
Russia 7.1 5.1 4.7 4.6 4.3 4.7 4.6 4.5 4.3
India 6.9 3.0 3.2 3.2 – – – – –
China 2.5 2.7 2.7 2.8 1.5 1.6 1.6 1.6 –
Advanced economies4 1.5 1.5 1.4 – – 1.4 1.6 – –
Emerging economies4 4.3 3.2 3.1 3.1 3.1 2.2 2.2 2.1 2.1
World economy4 2.8 2.4 2.3 – – 1.6 1.6 – –
1 Average annual consumer price inflation, in percent.2 Year-on-year change of the consumer price index (CPI), in percent.3 Core inflation is a measure of inflation that excludes certain items that can experience volatile price movements, such as energy and
certain food items; year-on-year change of the core consumer price index, in percent.4 Calculations are based on nominal GDP weights derived from purchasing power parity exchange rates.
Source: Thomson Reuters Datastream, Wellershoff & Partners
Inflation overview
11 | FX Monthly
Source: Thomson Reuters Datastream, Wellershoff & Partners
−10
−5
0
5
10
15
20
in p
erce
nt
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Brazil Russia India China
Consumer price inflation in emerging economies
−4
−2
0
2
4
6
in p
erce
nt
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
USA Eurozone UK Switzerland Japan
Consumer price inflation in advanced economies
FX Monthly | 12
Source: Thomson Reuters Datastream, Wellershoff & Partners
−6
−4
−2
0
2
4
in p
erce
ntag
e po
ints
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
EURUSD USDJPY GBPUSD EURCHF USDCHF
Interest rate differentials
Interest rates
Current exchange
rate
Interest rate differentials 3 months1 Interest rate differentials 12 months1
Current 1 year ago Ø 5 years Ø 10 years Current 1 year ago Ø 5 years Ø 10 years
EURUSD 1.105 2.70 1.53 0.63 2.37 3.09 1.80 0.77 0.71
USDJPY 106.8 -2.37 -1.28 -0.71 -1.92 -2.71 -1.58 -0.94 -0.91
GBPUSD 1.231 1.53 0.70 0.17 1.07 1.81 0.80 0.17 0.14
EURCHF 1.090 -0.36 -0.45 -0.47 -0.33 -0.28 -0.42 -0.57 -0.58
USDCHF 0.986 -3.06 -1.98 -1.10 -2.70 -3.36 -2.23 -1.34 -1.29
GBPCHF 1.215 -1.53 -1.27 -0.93 -1.62 -1.55 -1.42 -1.17 -1.15
CHFJPY 108.2 0.69 0.69 0.39 0.78 0.66 0.65 0.39 0.38
AUDUSD 0.686 0.83 -0.38 -1.83 1.29 1.33 0.12 -1.31 -1.40
USDCAD 1.318 -0.35 0.05 0.44 0.12 -0.49 -0.16 0.25 0.24
USDSEK 9.618 -2.73 -1.63 -0.30 -1.90 -2.99 -1.80 -0.45 -0.40
USDRUB 65.7 3.92 8.43 7.37 5.10 4.60 7.91 7.05 7.18
USDBRL 4.063 13.54 12.61 9.83 3.28 4.91 8.50 8.90 9.05
USDCNY 7.124 0.52 2.32 3.05 1.10 0.65 2.08 2.70 2.69
USDTRY 5.722 21.31 13.39 10.70 13.95 23.66 13.33 10.75 10.52
USDINR 71.71 7.47 8.11 8.14 3.73 4.66 5.68 6.16 6.06
1 The gap in interest rates between the second currency and the first one, in percentage points; e.g. US dollar minus euro for EURUSD.
Interest rate differentials overview
13 | FX Monthly
Source: Thomson Reuters Datastream, Wellershoff & Partners
−2
0
2
4
6
in p
erce
nt
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
USA Eurozone UK Switzerland Japan
10-year government bond yields
−2
0
2
4
6
8
in p
erce
nt
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
USA Eurozone UK Switzerland Japan
3-month Libor
FX Monthly | 14
FX markets
Current exchange
rate
Performance1 Purchasing Power Parity2
YTD 3 months 1 year 5 years PPP Neutral territory Deviation3
EURUSD 1.105 -3.4 -2.6 -5.0 -14.7 1.28 1.11 - 1.45 -13.6
USDJPY 106.8 -2.7 -1.2 -3.7 1.8 86.3 71.1 - 101.6 23.7
GBPUSD 1.231 -3.3 -3.5 -4.9 -24.5 1.57 1.4 - 1.8 -21.8
EURCHF 1.090 -3.3 -2.6 -3.2 -9.6 1.19 1.1 - 1.27 -8.0
USDCHF 0.986 0.1 -0.1 1.9 6.0 0.93 0.81 - 1.04 6.4
GBPCHF 1.215 -3.2 -3.5 -3.1 -20.0 1.46 1.26 - 1.66 -16.8
CHFJPY 108.2 -2.7 -1.1 -5.5 -4.0 93.1 78.8 - 107.4 16.2
AUDUSD 0.686 -2.6 -2.2 -4.9 -26.9 0.70 0.59 - 0.85 -2.1
USDCAD 1.318 -3.5 -0.8 -0.1 21.1 1.20 1.1 - 1.3 10.1
USDSEK 9.618 8.5 2.5 5.7 35.6 7.65 6.59 - 8.71 25.8
USDRUB 65.7 -5.2 1.4 -5.0 77.5 46.7 37 - 56.3 40.9
USDBRL 4.063 4.8 5.4 -2.3 80.7 3.07 2.51 - 3.64 32.3
USDCNY 7.124 3.8 3.0 4.3 16.0 6.28 6.04 - 6.51 13.5
USDTRY 5.722 7.6 -1.2 -13.3 165.0 4.20 3.79 - 4.62 36.1
USDINR 71.71 2.7 3.2 -0.3 18.7 68.7 64.4 - 72.9 4.4
1 Performance over the respective period of time, in percent.2 Purchasing power parity (PPP) is estimated based on the relative development of inflation rates in two currency markets;
the neutral territory is determined by ± 1 standard deviation of the historical variation around the PPP value.3 Deviation of the current spot rate from PPP, in percent.
Source: Thomson Reuters Datastream, Wellershoff & Partners
and in the UK the likelihood of a hard Brexit has reced-
ed. In turn, all major currencies have appreciated against
the Swiss franc since mid-August. The biggest gainer
was the British pound, which had been undercut by the
worrying political developments in prior weeks.
Despite the slackening of tensions in some arenas
lately, we caution that political risks remain high, and
not only from Brexit. It would be mistaken to think that
political winds could not reverse again and with equal
speed.
Currency markets are at the mercy of political develop-
ments these days. The remarkable accumulation of po-
litical risk this year drove investors into the safe-haven
comfort of the Swiss franc. At least this was the case
until the beginning of August. In an effort to dampen
the franc’s recent appreciation, the Swiss National Bank,
after a two-year hiatus, resumed its foreign currency
purchases.
Most recently, however, the winds have shifted on
various political fronts and they are now blowing against
the currency markets. The US and China have an-
nounced high-level trade talks, Hong Kong’s prime min-
ister has withdrawn the controversial extradition bill,
FX overview
15 | FX Monthly
Source: Thomson Reuters Datastream, Wellershoff & Partners
1020304050607080
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
USDRUB
1.00
1.50
2.00
2.50
3.00
3.50
4.00
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
USDBRL
5.506.006.507.007.508.008.509.00
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
USDCNY
35404550556065707580
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
USDINR
1.00
1.20
1.40
1.60
1.80
2.00
2.20
1985 1990 1995 2000 2005 2010 2015 2020
GBPUSD
0.20
0.40
0.60
0.80
1.00
1.20
1985 1990 1995 2000 2005 2010 2015 2020
AUDUSD
1.00
1.20
1.40
1.60
1.80
2.00
2.20
1985 1990 1995 2000 2005 2010 2015 2020
EURCHF
0.50
1.00
1.50
2.00
2.50
3.00
1985 1990 1995 2000 2005 2010 2015 2020
USDCHF
0.60
0.80
1.00
1.20
1.40
1.60
1985 1990 1995 2000 2005 2010 2015 2020
SpotPPPNeutral territory
EURUSD
50
100
150
200
250
300
1985 1990 1995 2000 2005 2010 2015 2020
USDJPY
FX Monthly | 16
FX volatility
Source: Thomson Reuters Datastream, QCAM Currency Asset Management, Wellershoff & Partners
0
5
10
15
20
25
30
1−m
onth
his
toric
al v
olat
ility
in p
erce
nt
2005 2010 2015 2020
QCAM volatility indicator3
Current exchange
rate
Volatility 3 months1 Volatility 12 months1
Historical Implied Ø 5 years2 Ø 10 years2 Historical Implied Ø 5 years2 Ø 10 years2
EURUSD 1.105 5.0 5.5 8.4 9.4 5.9 6.1 8.5 9.9
USDJPY 106.8 6.9 6.6 9.0 9.7 6.3 7.0 9.4 10.6
GBPUSD 1.231 7.1 11.6 9.3 9.2 8.2 10.1 9.5 9.8
EURCHF 1.090 4.7 5.3 6.1 6.2 4.6 5.3 6.7 6.9
USDCHF 0.986 6.2 6.1 8.3 9.4 5.9 6.6 8.7 10.0
GBPCHF 1.215 7.9 11.2 9.3 9.4 8.0 9.9 9.6 10.0
CHFJPY 108.2 5.6 5.6 8.9 10.4 6.2 6.2 9.5 11.2
AUDUSD 0.686 7.0 7.1 9.7 10.8 7.9 7.9 10.3 11.6
USDCAD 1.318 5.1 5.3 7.9 8.5 5.8 5.8 8.2 9.0
USDSEK 9.618 7.0 7.6 9.7 11.1 8.2 8.3 10.0 11.7
USDRUB 65.7 9.2 10.0 17.0 14.1 9.6 11.4 17.2 14.9
USDBRL 4.063 12.8 13.2 15.9 14.6 14.1 13.3 15.9 15.4
USDCNY 7.124 4.4 5.3 4.7 3.5 3.8 5.6 5.5 4.4
USDTRY 5.722 23.1 16.5 15.2 13.3 20.7 18.6 16.2 14.6
USDINR 71.71 5.7 6.5 6.6 8.5 6.5 6.6 7.7 9.5
3 The QCAM volatility indicator measures general volatility in global FX markets; the indicator is based on historical volatility
of the main exchange rates, which are weighted by trading volume.
1 Annualized volatility, in percent. 2 Average of implied volatility.
FX volatility overview
17 | FX Monthly
Source: Thomson Reuters Datastream, Wellershoff & Partners
0
10
20
30
40
50
60
3−m
onth
impl
icit
vola
tility
in p
erce
nt
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
USDRUB USDBRL USDCNY USDTRY USDINR
Implicit volatility
0
5
10
15
20
25
30
3−m
onth
impl
icit
vola
tility
in p
erce
nt
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
EURUSD USDJPY GBPUSD EURCHF USDCHF
Implicit volatility
FX Monthly | 18
Source: Thomson Reuters Datastream, Wellershoff & Partners
0
50
100
150
200
250
300
inde
x (J
anua
ry 2
002
= 10
0)
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Money market Government bonds Stocks Real estate
Performance of selected Swiss asset classes
Financial markets
Performance in either local curreny or USD1 Performance in CHF1
YTD 3 months 1 year 5 years YTD 3 months 1 year 5 years
Swiss money market -0.3 -0.1 -0.7 -2.8 -0.3 -0.1 -0.7 -2.8
Swiss government bonds 4.5 3.0 6.4 15.3 4.5 3.0 6.4 15.3
Swiss corporate bonds 3.5 1.6 4.1 10.6 3.5 1.6 4.1 10.6
Swiss equities (SMI) 22.0 5.8 17.5 38.7 22.0 5.8 17.5 38.7
European equities (Stoxx600) 18.1 2.1 4.5 36.5 16.7 0.8 -0.1 25.1
UK equities (Ftse100) 14.9 2.7 2.4 37.7 13.3 -3.0 -3.4 11.7
Japanese equities (Topix) 6.8 -1.8 -5.8 39.0 8.6 -0.8 -3.8 44.1
US equities (S&P 500) 20.1 3.7 9.2 68.1 19.2 4.6 8.9 51.0
Emerging markets equities 9.8 -3.7 -0.2 12.6 8.9 -2.8 -0.5 1.1
Global equities (MSCI World) 18.3 2.9 5.6 43.3 17.3 3.8 5.3 28.8
Swiss real estate 14.7 2.5 12.7 39.1 14.7 2.5 12.7 39.1
Global real estate 18.1 3.2 11.1 35.5 17.2 4.1 10.7 21.7
Commodities 3.2 -4.7 -8.1 -39.7 2.3 -3.9 -8.4 -45.8
Brent oil 20.7 -10.3 -17.9 -40.4 19.8 -9.5 -18.1 -46.5
Gold 9.0 6.8 10.7 4.4 8.2 7.8 10.4 -6.2
1 Performance over the respective period of time, in percent.
Performance overview
19 | FX Monthly
Source: Thomson Reuters Datastream, Wellershoff & Partners
0
500
1000
1500
2000
USD
per
troy
oun
ce
0
20
40
60
80
100
120
140
160
USD
per
bar
rel (
Bren
t)
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Oil price (lhs) Gold (rhs)
Performance of selected commodity prices
0
50
100
150
200
250
300
350
400
inde
x (J
anua
ry 2
002
= 10
0)
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
USA Eurozone UK Switzerland Japan
Performance of selected equity markets (in local currency)
FX Monthly | 20
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This report has been prepared and published by QCAM Currency Asset
Management AG and Wellershoff & Partners Ltd. The analysis contained herein is
based on numerous assumptions. Different assumptions could result in materially
different results. Although all information and opinions expressed in this document
were obtained from sources believed to be reliable and in good faith, no represen-
tation or warranty, express or implied, is made as to its accuracy or completeness.
All information and opinions indicated are subject to change without notice. This
document may not be reproduced or circulated without the prior authorization of
QCAM Currency Asset Management AG or Wellershoff & Partners Ltd. Neither
QCAM Currency Asset Management AG nor Wellershoff & Partners Ltd. will be li-
able for any claims or lawsuits from any third parties arising from the use or distri-
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es as may be permitted by applicable law.
Number of the monthThe US Federal Reserve cut rates by 25 basis points at
the end of July. The move was justified to counter the
danger of an economic slowdown. Or did the Fed cave
in to pressure from President Trump, who has been call-
ing for lower interest rates? In any case, he was not sat-
isfied with the Fed’s decision. In Trump’s view, the Fed
missed a chance to cut rates by at least 100 basis points.
The next opportunity comes on18 September. The Fed
could refrain from making a cut, not least to demon-
strate its independence. But that does not look likely.
25 basis points