Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. July 2017 Jason Henderson Director of Purdue Extension Associate Dean College of Agriculture www.extension.purdue.edu International Currency Markets
Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.
July 2017
Jason HendersonDirector of Purdue ExtensionAssociate Dean College of Agriculturewww.extension.purdue.edu
International Currency Markets
Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.
The U.S. Dollar Moves Due to …
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Real Trade Weighted U.S. Dollar Index: Broad
Index Mar 1973=100
Source: Board of Governors Federal Reserve System
Trade
Financial Flows
Fear
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F
U.S. Agriculture Value-Added and Net Farm Income(Three-Year Moving Average)
Value Added Net Farm Income
Billions (2016 constant dollars)
International Trade is a Key Driver of Agricultural Cycles
World War I Russian Grain DealWorld War IIChina & Ethanol
Calculations based on USDA data deflated with Consumer Price Index
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1970s/1980s U.S. Ag Exports
1972 $ 53.9 billion
1981 $114.1 billion
1986 $ 57.3 billion
2000s/2010s U.S. Ag Exports
2005 $ 77.5 billion
2014 $151.8 billion
2016 $133.7 billionNote: Export value data presented in 2016 constant dollarsSource: USDA
Note: Export value data presented in 2016 constant dollarsSource: USDA
1910s/1920s U.S. Foodstuff Exports
1910 $ 9.5 billion
1920 $24.3 billion
1936 $ 3.5 billionNote: Export value data presented in 2016 constant dollarsSource: Census Bureau, Historical Statistics of the United States
1940s/1950s U.S. Ag Exports
1940 $ 8.9 billion
1947 $ 42.4 billion
1953 $ 25.5 billionNote: Export value data presented in 2016 constant dollarsSource: USDA
Global Trade and Policy Shapes Farm Incomes
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Trade
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U.S. Dollar Fundamentals: Trade
• Strong demand for goods and services supports a strong dollar
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U.S. Trade Deficit(Exports minus Imports)
Billions of Chained 2009 Dollars
Source: U.S. Bureau of Economic Analysis
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U.S. Dollar Fundamentals: Economic Growth
• Stronger U.S. economy supports a strong dollar
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U.S. GDP Minus World GDPPercent
Source: World Bank
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The U.S. Dollar Moves Due to … Financial Flows
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Real Trade Weighted U.S. Dollar Index: Broad
Index Mar 1973=100
Source: Board of Governors Federal Reserve System
1981 to 1985: High US Interest Rates
Stronger Economy
1997 to 2001:Asian Financial Crisis
Stronger Economy
2015 to 2017:Higher Interest Rates
Stronger economy
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Financial Flows
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Financial Flows are More Dominant than Ever
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1976 1981 1986 1991 1996 2001 2006 2011 2016
U.S. Net International Investment Position (Asset Minus Liabilities)
Billions of 2016 Dollars
Source: U.S. Bureau of Economic Analysis
Assets: US purchasesLiabilities: Foreign purchases
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Financial Flows are More Dominant than Ever
1976-1980
1990-1994
2012-2016
Exports 315.3 730.8 2,072.4
Imports (367.2) (797.6) (2,548.2)
Net Exports
(51.9) (66.8) (476.1)
1976 -1980
1990-1994
2012-2016
Assets 1,567 4,886 24,228
Liabilities (1,227) (5,250) 30,877
Net Position
340 (275) (6,649)
Source: U.S. Bureau of Economic Analysis
Net Exports of Goods and Services(Billions of dollars)
Net International Investment Position(Billions of dollars)
Source: U.S. Bureau of Economic Analysis
Financial Flow are 10 Fold Export Activity
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Financial Flows (Equity, Debt, & Derivatives) Shifted with Financial Conditions
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1982 1986 1990 1994 1998 2002 2006 2010 2014
U.S. International Positions - Assets
Equity Debt Derivatives
Percent
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Financial Flows (Equity, Debt, & Derivatives) Shifted with Financial Conditions
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1982 1986 1990 1994 1998 2002 2006 2010 2014
U.S. International Positions - Liabilities
Equity Debt Derivatives
Percent
Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.
Financial Flows (Equity, Debt, & Derivatives) Shifted with Financial Conditions
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1976 1981 1986 1991 1996 2001 2006 2011 2016
U.S. International Positions - Asset
Direct Portfolio
Percent
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Is This Good for the U.S. Economy?
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1976 1981 1986 1991 1996 2001 2006 2011 2016
U.S. Net International Investment Position (Asset Minus Liabilities)
Billions of 2016 Dollars
Source: U.S. Bureau of Economic Analysis
Assets: US purchasesLiabilities: Foreign purchases
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Fear and Uncertainty
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Exchange Rates Move with Fear
Brazil: 2017
Brexit: 2017
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The Euro and Germany
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Euro and Germany Exchange Rate with US
Germany Euro
Foreign currency to US dollar ratio
Source: Board of Governors Federal Reserve System
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Interest Rates and Exchange Rates
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Interest Rate Movements Drive Financial Flows
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Yields on 10-Year Bonds
Germany Great Britian Japan US
Percent
Source: Board of Governors Federal Reserve System
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Fed Funds RatesMidpoint of target range
Source: Federal Reserve Board of Governors
Longer Run
How will the Fed Normalize Rates?
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The Next Step in Normalization: Shrinking the Balance Sheet
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Fed Agency Debt MBS
Liquidity to Key CreditMarkets
Lending to FinancialInstitutions
Long-Term Treasuries
Traditional SecurityHoldings
Billions of dollars
Federal Reserve Balance Sheet: Assets
Source: Federal Reserve Bank of Cleveland
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What Drives Interest Rates Higher?
Too much money
chasing
too few goods
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The U.S. is Expected to Lead the Rebound
Area 2016 2017 2018
World 3.1 3.4 3.6
Advanced 1.6 1.9 2.0
US 1.6 2.3 2.5
Euro Area 1.7 1.6 1.6
EMDE 4.1 4.5 4.8
China 6.7 6.5 6.0
India 6.6 7.2 7.7
Russia -0.6 1.1 1.2
Latin America -0.7 1.2 2.1
Source: International Monetary Fund, January 2017
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Will Demographics be the Trigger?
– Millennial spending: Homes, cars, families …– Boomer spending: Retirement, health care …
Percent change per yearU.S. Population Growth
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25 to 44 year olds 45 to 64 year olds 65 years or overCalculations based on U.S. Census data
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Slower Labor Force Growth is Expected to Trim Potential GDP
US Potential GDP(Average Annual Growth)
Source: Congressional Budget Office
1950 -1973
1974-1981
1982-1990
1991-2001
2002-2007
2008-2014
2015-2025
Potential GDP 4.0 3.3 3.2 3.2 2.8 1.4 1.8
Potential Labor Force 1.6 2.5 1.6 1.3 0.9 0.5 0.5
PotentialLabor Force Productivity
2.4 0.8 1.6 1.9 1.9 0.9 1.3
Lower Potential GDP Suggests Inflation Rises at Lower Growth Rates.
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Policy Implications
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Ag Export Destinations are Different than Manufactured Export Destinations
Country Share
(1) China 16.7%
(2) Canada 15.0%
(3) Mexico 13.1%
(4) Japan 8.7%
(5) Korea, South 4.3%
Country Share
(1) Canada 19.3%
(2) Mexico 15.5%
(3) China 6.4%
(4) Japan 4.1%
(5) United Kingdom 3.4%
Country Share
(1) Canada 33.7%
(2) Mexico 13.4%
(3) Germany 5.2%
(4) Japan 5.0%
(5) France 4.2%
U.S. Ag Exports(2012-2016)
U.S. Manufactured Exports(2012-2016)
IN Manufactured Exports(2012-2016)
Source: USDA Source: International Trade Admin. Source: International Trade Admin.
Will Trade Policy Reflect Ag Interests?
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U.S. Agricultural Exports
High-Value Bulk
Billions (2016 constant dollars)
Calculations based on USDA data deflated with Consumer Price Index
Are Bulk or Consumer Exports the Future?
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Are Bulk or Consumer Exports the Future?
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Exports to Developing Countries
Bulk Intermediate Consumer
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Exports to Developed Countries
Bulk Intermediate Consumer
Billions (2016 constant dollars) Billions (2016 constant dollars)
Calculations based on USDA data deflated with Consumer Price Index
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Policy Implications for Agriculture:When Do Multinational Companies Buy US?
Strong Dollar Weak Dollar
When is U.S. currency strong?
When do multinationals want to repatriate funds?
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When will the Exchange Rate Environment Change?
• China: a Consumer or a Producer Driven Economy?
• What about other developing nations?
Consumers
Strong Currency
Producers
Weak Currency
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Conclusions
• Currency markets and trade are important for ag• Financial flows and fear/uncertainty are more
important drivers of currency markets
• Strong economic growth, high returns, and stability drive a strong dollar.
• A strong dollar might be with us for some time.