international currency markets - purdue agriculture

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


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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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


1970s/1980s U.S. Ag Exports

1972 $ 53.9 billion

1981 $114.1 billion

1986 $ 57.3 billion


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


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


Trade


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


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


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


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


Financial Flows


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


Assets: US purchasesLiabilities: Foreign purchases


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)


Net Exports of Goods and Services(Billions of dollars)

Net International Investment Position(Billions of dollars)


Financial Flow are 10 Fold Export Activity


Financial Flows (Equity, Debt, & Derivatives) Shifted with Financial Conditions

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U.S. International Positions - Assets

Equity Debt Derivatives

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U.S. International Positions - Liabilities

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U.S. International Positions - Asset

Direct Portfolio

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Is This Good for the U.S. Economy?

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U.S. Net International Investment Position (Asset Minus Liabilities)

Billions of 2016 Dollars


Assets: US purchasesLiabilities: Foreign purchases


Fear and Uncertainty


Exchange Rates Move with Fear

Brazil: 2017

Brexit: 2017


The Euro and Germany

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Euro and Germany Exchange Rate with US

Germany Euro

Foreign currency to US dollar ratio



Interest Rates and Exchange Rates


Interest Rate Movements Drive Financial Flows

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Yields on 10-Year Bonds

Germany Great Britian Japan US

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Fed Funds RatesMidpoint of target range

Source: Federal Reserve Board of Governors

Longer Run

How will the Fed Normalize Rates?


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


What Drives Interest Rates Higher?

Too much money

chasing

too few goods


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


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


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.


Policy Implications


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)


Are Bulk or Consumer Exports the Future?


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

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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?


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


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.

international currency markets - purdue agriculture

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