Economics Report
Morgan Stanley
No, the Sky is Not Falling
USD structurally sound,
but may weaken for cyclical reasons.
April 2006
Stephen L. Jen
Stephen.Jen@morganstanley.com
Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision.
Please see important disclosures at the end of this report.
April 2006
Currency Economics
1.
USD index not overvalued
Slide 2
2. ‘De facto dollar zone’
Slide 5
3. Excess savings in Asia
Slide 7
4. Dollar the hegemonic currency
Slide 12
China’s CNY policy
Slide 18
How much will the dollar ‘need’ to fall?
Slide 22
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
2
April 2006
Currency Economics
The USD is no longer over-valued
USD Actual and Long Run (Non-Linear) Fair Value
130
120
110
100
90
80
70
20
05
Q
1
20
03
Q
1
20
01
Q
1
19
99
Q
1
19
97
Q
1
19
95
Q
1
19
93
Q
1
19
91
Q
1
19
89
Q
1
19
87
Q
1
19
85
Q
1
19
83
Q
1
19
81
Q
1
19
79
Q
1
19
77
Q
1
19
75
1
Q
Q
1
19
73
60
USD Misvaluation Confidence Based on Long Run Fair Value (Non-Linear Filter)
Undervalued
100%
0%
20
05
Overvalued
Q
1
20
03
Q
1
20
01
Q
1
19
99
Q
1
19
97
Q
1
19
95
Q
1
19
93
Q
1
19
91
Q
1
19
89
Q
1
19
87
Q
1
19
85
Q
1
19
83
Q
1
19
81
Q
1
19
79
Q
1
19
77
Q
1
19
75
1
Q
Q
1
19
73
-100%
Source: Morgan Stanley Research
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
3
April 2006
Currency Economics
Q4 2005
Q-End Spot
PPP - CPI
PPP - PPI
PPP - TPI
SP - CPI/Long
SP - CPI/Short
SP - PPI/Long
SP - PPI/Short
MM - Flex
MM - Sticky
RID - Short
RID - Long
BEER I
BEER II
Valuation Matrix – G10
EUR/USD
1.18
1.12
1.16
1.22
1.06
1.10
1.16
1.15
1.05
1.07
1.24
1.21
1.46
1.48
USD/JPY
118.03
99.84
82.86
106.97
96.58
101.31
80.85
82.96
140.78
143.19
104.67
100.84
108.52
109.72
Median
Mean
Weighted Mean
1.16
1.19
1.20
101.31
104.55
97.86
109.08
117.43
109.94
1.63
1.67
1.69
1.43
1.44
1.39
0.69
0.70
0.70
8.17
8.22
8.17
8.73
8.72
8.86
1.23
1.29
1.25
0.69
0.68
0.67
0.60
0.59
0.60
High
Low
1.48
1.05
143.19
80.85
146.77
92.49
1.91
1.58
1.63
1.31
0.78
0.66
8.66
7.62
9.15
8.12
1.50
1.17
0.79
0.62
0.68
0.51
02/03/2006 EUR/USD
Current spot
1.20
% Misalignment
3.45%
USD/JPY
116.13
14.62%
Preferred Model
RID(2)
SP(1)
EUR/JPY GBP/USD EUR/CHF EUR/GBP EUR/NOK EUR/SEK USD/CAD AUD/USD
139.23
1.72
1.55
0.69
7.99
9.39
1.17
0.73
109.08
1.63
1.38
0.68
7.62
8.65
1.42
0.62
108.15
1.80
1.36
0.66
8.66
8.90
1.17
0.69
136.44
1.61
1.63
0.76
8.24
8.73
1.43
0.62
109.75
1.63
1.43
0.69
7.78
9.02
1.50
0.62
108.98
1.63
1.40
0.68
7.68
8.70
1.46
0.62
108.31
1.91
1.44
0.67
8.64
9.09
1.22
0.69
108.08
1.79
1.40
0.66
8.66
8.90
1.21
0.70
92.49
1.62
1.31
0.71
8.17
8.12
1.27
0.62
92.49
1.61
1.31
0.68
8.17
8.12
1.30
0.65
134.50
1.59
1.63
0.71
8.65
8.48
1.23
0.74
127.89
1.58
1.52
0.78
8.26
8.31
1.21
0.74
143.70
1.70
1.46
0.70
8.15
9.15
1.17
0.79
146.77
1.67
1.46
0.70
8.15
9.15
1.17
0.76
NZD/USD
0.68
0.54
0.63
0.51
0.55
0.54
0.63
0.64
0.55
0.55
0.60
0.60
0.68
0.68
EUR/JPY GBP/USD EUR/CHF EUR/GBP EUR/NOK EUR/SEK USD/CAD AUD/USD NZD/USD
139.16
1.75
1.57
0.69
8.03
9.47
1.13
0.75
0.67
27.57%
7.00%
9.46%
-0.49%
-1.79%
8.51%
-7.65%
7.61%
11.14%
PPP(1)
SP(3)
PPP(1)
BEER(1)
BEER(1)
SP(3)
BEER(1)
SP(3)
SP(4)
Source: Morgan Stanley Research
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
4
April 2006
Currency Economics
1.
USD index not overvalued
Slide 2
2. ‘De facto dollar zone’
Slide 5
3. Excess savings in Asia
Slide 7
4. Dollar the hegemonic currency
Slide 12
China’s CNY policy
Slide 18
How much will the dollar ‘need’ to fall?
Slide 22
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
5
April 2006
Currency Economics
De facto Dollar zone
US
USD Zone
- Asia only
Trade Balance Against:
World
Non USD Zone
-6.0%
-3.2%
-2.3
NA
-2.4
NA
Source: BEA, Morgan Stanley Research
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
6
April 2006
Currency Economics
1.
USD index not overvalued
Slide 2
2. ‘De facto dollar zone’
Slide 5
3. Excess savings in Asia
Slide 7
4. Dollar the hegemonic currency
Slide 12
China’s CNY policy
Slide 18
How much will the dollar ‘need’ to fall?
Slide 22
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
7
April 2006
Currency Economics
Feldstein-Horioka a bit less puzzling
I/Y
B2
A2
A1
B1
45-degree line
S/Y
I/Y(i, t) = α(i) + α(t) + β (S/Y)(i,t) + ε(i,t)
β
OECD
EU
Asia ex-Japan
Latin America
(1960-1979)
0.60
0.52
0.56
0.36
Stephen.Jen@morganstanley.com +44-20-7425-8583
β
(1980-2004)
0.33
0.13
0.39
0.27
Feldstein-Horioka’s
1960-1974
sample: β = 0.89
Please see important disclosures at the end of this report.
8
April 2006
Currency Economics
Excess Savings in Asia
Asian C/A surpluses
Savings and Investment
Asia’s savings rates have been
ultra-stable …
14
12
SE
Asia
Percent of GDP
10
But investment rates have been
extraordinarily volatile
8
North
Asia
38
6
36
SE Asia Savings
4
34
Japan
32
0
1990
1992
1994
1996
1998
2000
2002
Source: CEIC, Morgan Stanley Research
2004
Percent of GDP
2
North Asia
Savings
30
28
26
North Asia
Investment
24
SE Asia
Investment
22
C/A surpluses exploded after the
Asian Crisis in 1997/98
20
18
1990
1992
1994
1996
1998
2000
2002
2004
Source: CEIC, Morgan Stanley Research
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
9
April 2006
Currency Economics
Abundant External Financing
C/A as relative percentage of US C/A
140
120
Rest of
World
100
Euro-area
80
Japan
60
Euro-area
Japan
China
Japan
AXJC
2006 est.
44.9%
USD
361.7bn
China
40
2006 est.
41.9%
OPEC
USD
337.1bn
Asia
Asia
20
OPEC
OPEC
0
1999
2000
2001
2002
2003
2004
2005F
2006F
Source: IMF WEO
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
10
April 2006
Currency Economics
As wrong as the JGB call in ‘98
Ricardian Equivalence Sort of Held in Japan
Watch the Corporates, Not Households
Ne t Savings Position of Private /Public Se ctor
16
(as % of GDP)
12
Private Sector Savings
8
4
0
80,000
(billion yen)
Net Private Sector Savings
Total Private
Non-Financial
Financial
Households
-4
60,000
Public Sector Savings
-8
40,000
-12
FY90
FY92
FY94
FY96
FY98
FY00
FY02
20,000
Source: DataStream and Morgan Stanley Research
0
Mirror images
-20,000
• Because of the extremely high level of public
debt, RE may be degenerating.
• Private savings may more than offset public
dis-savings.
-40,000
-60,000
Stephen.Jen@morganstanley.com +44-20-7425-8583
FY90
FY92
FY94
FY96
FY98
FY00
FY02
Please see important disclosures at the end of this report.
11
April 2006
Currency Economics
1.
USD index not overvalued
Slide 2
2. ‘De facto dollar zone’
Slide 5
3. Excess savings in Asia
Slide 7
4. Dollar the hegemonic currency
Slide 12
China’s CNY policy
Slide 18
How much will the dollar ‘need’ to fall?
Slide 22
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
12
April 2006
Currency Economics
Globalisation of the goods
market
vs
Globalisation of the asset
markets
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
13
April 2006
Currency Economics
The Dollar is special, especially to Asia
The Dollar's Facilitating Role
As International Money
Medium of Exchange
Store of Value
Official
Private
Intervention
Vehicle
Reserves
Banking
Peg
Invoice
Unit of Account
Source: Kenen (1983)
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
14
April 2006
Currency Economics
Two-dimensional Reserve Diversification
USTs most liquid sovereign market
Diversification in two dimensions
Asset
Corporate Bonds
Agency
Sovereign
USD
G3
G4-G10
Currency
Source: Morgan Stanley Research
Not necessarily USD negative
USD Share of Official Reserve Holdings
80%
70%
60%
50%
40%
30%
TIC
NYFRB
BIS
IMF
NIIP
20%
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Source: US Federal Reserve, IMF, BIS, BEA, US Treasury, Morgan Stanley Research
Stephen.Jen@morganstanley.com +44-20-7425-8583
US
Japan
EMU
Germany
France
Italy
Netherlands
Belgium
Ireland
Spain
Portugal
Greece
Austria
Luxembourg
Finland
U.K.
Switzerland
Sweden
Australia
New Zealand
Canada
Depth and Liquidity of the Markets
Of Various Potential Reserve Assets
(In percent of total market caps)
Sovereign
bonds
excluding
Sovereign
JGBs
Corporate
Bonds
Bonds
Amounts outstanding
40%
57%
57%
30.0%
0.0%
16.1%
23.1%
32.9%
21.6%
4.9%
7.0%
2.9%
5.0%
7.1%
5.4%
6.5%
9.2%
4.9%
1.2%
1.7%
1.3%
1.4%
2.0%
0.9%
0.2%
0.3%
1.1%
1.9%
2.7%
4.1%
0.4%
0.6%
0.4%
0.9%
1.3%
0.0%
0.4%
0.6%
0.4%
0.0%
0.0%
0.0%
0.3%
0.4%
0.3%
2.9%
4.1%
0.7%
0.5%
0.7%
0.3%
0.7%
0.9%
0.6%
0.4%
0.6%
2.2%
0.0%
0.0%
0.0%
2.4%
3.5%
2.1%
Equities
Market Value
47%
12.7%
19.4%
4.1%
5.4%
2.7%
1.8%
0.9%
0.4%
2.3%
0.2%
0.4%
0.5%
0.1%
0.7%
10.4%
3.0%
1.2%
2.4%
0.1%
4.0%
Source: BIS, DataStream, US Federal Reserve
Note. US Sovereign bonds include Agency or quasi-government bonds (USD3.5 trillion)
in addition to US Sovereigns (USD5.7 trillion)
Please see important disclosures at the end of this report.
15
April 2006
Currency Economics
Weak evidence of wholesale diversification
2004
I
II
2005
III
IV
Ip
IIp
IIIp
IVp
All countries
Total foreign exchange holdings
Allocated reserves 1/
Claims in U.S. dollars
Claims in pounds sterling
Claims in Japanese yen
Claims in Swiss francs
Claims in euros
Claims in other currencies
Unallocated reserves 2/
3,298,997 3,346,175 3,442,890 3,749,063 3,858,660 3,948,534 4,052,712 4,170,580
73.5%
72.4%
71.8%
70.4%
69.4%
68.6%
67.5%
67.4%
67.4%
67.7%
67.2%
65.8%
65.5%
66.1%
66.4%
66.5%
2.7%
2.7%
3.1%
3.4%
3.6%
3.6%
3.7%
3.7%
4.0%
3.9%
3.6%
3.8%
3.8%
3.6%
3.7%
3.6%
0.2%
0.2%
0.2%
0.2%
0.2%
0.1%
0.1%
0.1%
23.7%
23.6%
24.0%
25.0%
25.1%
24.9%
24.4%
24.4%
1.9%
1.8%
1.9%
1.8%
1.8%
1.6%
1.7%
1.6%
36.1%
38.0%
39.3%
42.0%
44.1%
45.7%
48.1%
48.4%
Industrial countries
Total foreign exchange holdings
Allocated reserves 1/
Claims in U.S. dollars
Claims in pounds sterling
Claims in Japanese yen
Claims in Swiss francs
Claims in euros
Claims in other currencies
Unallocated reserves 2/
1,268,588 1,258,727 1,269,547 1,314,596 1,301,681 1,294,605 1,281,605 1,292,249
99.8%
99.7%
99.7%
99.7%
99.7%
99.6%
99.6%
99.5%
73.7%
73.9%
73.3%
71.5%
72.1%
73.7%
73.7%
73.7%
1.3%
1.4%
1.8%
1.9%
2.1%
2.1%
2.1%
2.1%
3.6%
3.5%
3.4%
3.6%
3.3%
3.3%
3.4%
3.3%
0.2%
0.3%
0.1%
0.1%
0.2%
0.1%
0.1%
0.1%
19.4%
19.2%
19.6%
20.9%
20.4%
19.1%
19.0%
19.2%
1.8%
1.7%
1.8%
2.0%
1.9%
1.7%
1.7%
1.6%
0.2%
0.3%
0.3%
0.3%
0.3%
0.4%
0.4%
0.5%
Developing countries
Total foreign exchange holdings
Allocated reserves 1/
Claims in U.S. dollars
Claims in pounds sterling
Claims in Japanese yen
Claims in Swiss francs
Claims in euros
Claims in other currencies
Unallocated reserves 2/
2,030,409 2,087,449 2,173,344 2,434,467 2,556,978 2,653,929 2,771,107 2,878,331
57.0%
56.0%
55.4%
54.6%
53.9%
53.5%
52.7%
53.0%
60.6%
61.1%
60.9%
60.2%
59.4%
59.3%
60.1%
60.5%
4.2%
4.1%
4.3%
4.9%
5.0%
4.9%
5.1%
5.1%
4.4%
4.4%
3.9%
4.1%
4.3%
3.9%
3.9%
3.8%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
28.5%
28.3%
28.7%
29.0%
29.6%
30.1%
29.1%
28.8%
2.0%
1.9%
1.9%
1.6%
1.6%
1.6%
1.7%
1.6%
43.0%
44.0%
44.6%
45.4%
46.1%
46.5%
47.3%
47.0%
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
16
April 2006
Holdings of US Treasuries
Currency Economics
All Holders
Foreign holders
5000
4500
Federal Reserve
Japan
Total
US
OPEC
China
Other
5000
Total
4500
Federal Reserve
4000
4000
US
3500
3500
3000
3000
2500
2500
2000
2000
1500
1500
1000
1000
500
500
Foreigners
0
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Source: BEA and Morgan Stanley Research
Dec-02
Dec-03
Dec-04
0
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
Source: BEA and Morgan Stanley Research
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
17
April 2006
Currency Economics
1.
USD index not overvalued
Slide 2
2. ‘De facto dollar zone’
Slide 5
3. Excess savings in Asia
Slide 7
4. Dollar the hegemonic currency
Slide 12
China’s CNY policy
Slide 18
How much will the dollar ‘need’ to fall?
Slide 22
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
18
Currency Economics
8.08
Actual
Fitted
7/
21
8/ /20
1 0
09 5/2 5
/0 00
7 5
9/ /20
3 0
10 0/2 5
/2 00
11 5/2 5
/1 00
12 7/2 5
/1 00
01 2/2 5
/0 00
4 5
1/ /20
27 0
6
2/ /20
21 0
6
3/ /20
1 0
04 6/2 6
/1 00
05 0/2 6
/0 00
3 6
5/ /20
26 0
6
6/ /20
20 0
6
/
7/ 20
1 0
08 3/2 6
/0 00
7 6
8/ /20
30 0
6
9/ /20
22 06
10 /2
/1 00
11 7/2 6
/0 00
12 9/2 6
/0 00
12 4/2 6
/2 00
7/ 6
20
06
/A
12 ug/
/A 05
24 ug/
/A 05
05 ug/
/S 05
15 ep/
/S 05
27 ep/
/S 05
07 ep/0
/O 5
19 ct/0
/O 5
31 ct/0
/O 5
10 ct/
/N 05
22 ov/
/N 05
02 ov/
/D 05
14 ec/
/D 05
26 ec/
/D 05
05 ec/0
/J
5
17 an/0
/Ja 6
27 n/ 0
/J
6
08 an/
0
/F
6
20 eb/
/F 06
02 eb/0
/M 6
14 ar /
/M 06
24 ar /
/M 06
05 ar/0
/A 6
pr
/0
6
02
April 2006
A ‘CNY Event’ in H1 2006
8.12
8.10
"Gear2/Gear1"
ratio=2.2
8.06
8.04
8.02
"Gear3/Gear2"
ratio=2.3
8.00
8.15
Stephen.Jen@morganstanley.com +44-20-7425-8583
8.15
8.10
8.05
Gear 1
8.10
8.00
7.95
7.90
Gear 2
7.85
7.80
7.75
Gear 3
7.70
USDCNY trend 2
USDCNY trend 3
USDCNY
8.05
8.00
7.95
7.90
7.85
7.80
7.75
7.70
USDCNY trend 1
Please see important disclosures at the end of this report.
19
April 2006
Currency Economics
Accelerating rate of crawl of USD/CNY
Daily Damping Coefficient (20D MA)
Daily Rate of Crawl (20D MA)
0
0.12
0.10
-0.0002
0.08
-0.0004
0.06
0.04
-0.0006
0.02
-0.0008
0.00
-0.02
/0
18 5
/ 8/
05
1/9
/0
15 5
/ 9/
0
29 5
/ 9/
13 05
/ 10
/
27 05
/ 10
/
10 05
/ 11
/
24 05
/ 11
/0
8/1 5
2/
22 05
/ 12
/05
5/1
/0
19 6
/ 1/
06
2/2
/0
16 6
/ 2/
06
05
Stephen.Jen@morganstanley.com +44-20-7425-8583
4/8
21
/ 7/
21
/7
/0
5
4/
8/
0
18 5
/8
/0
5
1/
9/
0
15 5
/9
/0
29 5
/9
/
13 05
/1
0/
27 05
/1
0/
10 05
/1
1/
24 05
/1
1/
0
8/ 5
12
/
22 05
/1
2/
05
5/
1/
0
19 6
/1
/0
6
2/
2/
0
16 6
/2
/0
6
-0.001
Please see important disclosures at the end of this report.
20
April 2006
Currency Economics
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
China
In mlns
of USDs
64
798
2,653
1,019
1,509
2,294
3,484
4,584
5,655
6,898
11,348
16,345
18,725
20,646
23,388
26,850
33,314
45,623
57,846
85,386
99,999
96,863
In %
GDP
0.0%
0.0%
0.0%
0.0%
0.0%
0.8%
0.9%
1.1%
1.5%
1.8%
2.6%
3.0%
3.6%
2.9%
2.8%
3.0%
3.5%
4.6%
5.4%
7.3%
7.9%
6.9%
Pre-Funding of Future Private Flows
Korea
In mlns
In %
of USDs
GDP
151
0.2%
280
0.3%
331
0.4%
922
1.0%
2,148
2.0%
2,663
2.0%
3,779
2.1%
5,086
2.3%
6,638
2.6%
7,928
2.7%
9,014
2.9%
11,340
3.3%
16,281
4.1%
22,740
4.7%
33,738
6.5%
37,067
7.8%
43,805
13.8%
46,721
11.5%
52,242
11.4%
60,184
12.8%
67,833
12.4%
75,594
12.5%
Japan
In mlns
In %
of USDs
GDP
14,280
1.3%
33,910
2.8%
70,500
5.6%
137,660
10.2%
257,930
12.8%
373,970
15.4%
507,600
17.2%
667,840
22.6%
756,130
24.9%
869,370
25.0%
920,700
24.3%
998,280
22.9%
1,108,350
23.1%
1,216,910
23.1%
1,340,970
28.6%
1,414,090
32.9%
1,533,950
39.0%
1,710,650
38.3%
1,825,560
38.5%
1,970,850
47.3%
2,088,820
52.5%
2,293,870
• China’s private sector’s holdings of
foreign financial assets are extremely low
in absolute terms, relative to GDP, and
relative to those of Japan and Korea.
• Using innocuous assumptions, it would
not be difficult to imagine scenarios where
cumulative private sector outflows could
total US$0.5 trillion in five years’ time.
(Scenario 6 below)
53.4%
Scenarios
1
2
3
4
5
% Nominal
Growth
10%
10%
10%
10%
10%
% Annual RMB
Appreciation
0%
5%
0%
5%
0%
Year to see
US$300 bln
in outflows
10
6
5
4
N/A
FDI and
portfolio inv.
in % GDP
7.0%
7.0%
10% by 2010
10% by 2010
15% by 2010
Additional
outflows
in US$ blns.
$204
$264
$292
$377
$438
6
10%
5%
N/A
15% by 2010
$566
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
21
April 2006
Currency Economics
1.
USD index not overvalued
Slide 2
2. ‘De facto dollar zone’
Slide 5
3. Excess savings in Asia
Slide 7
4. Dollar the hegemonic currency
Slide 12
China’s CNY policy
Slide 18
How much will the dollar ‘need’ to fall?
Slide 22
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
22
April 2006
Currency Economics
Current
Spot
Wrong to ask the dollar to do all the work
% USD deval
20% 30% 40%
90%
EUR/USD
1.21
1.5
1.7
2.0
12.1
USD/JPY
118
94
83
71
12
USD/CNY
8.00
6.4
5.6
4.8
0.8
GBP/USD
1.74
2.2
2.5
2.9
17.4
Author
Date
• Don’t just ask the question, ‘how
much will the dollar need to correct?’
• Ask also whether the implied
exchange rates make any sense, or
are ‘acceptable.’ If the answer to this
second question is ‘no,’ then the
answer to the first question must not
be correct or relevant.
Title
Main Result
M. Obstfeld &
K. Rogoff
2000 “Perspectives on OECD Capital Market Integration:
Implications for US Current Account Adjustment”
16% RER depreciation will be needed to eliminate the CA
M. Mussa
2004 “Exchange Rate Adjustments Needed to Reduce Global
Payments Imbalances”
RER needs to depreciate 20% to reach a CA of 2%.
S. Edwards
2005 "Is the US Current Account Deficit Sustainable? And If So
How Costly Is Adjustment Likely to Be?"
A “sustainable" CA would imply a 28% cumulated
depreciation in the TWI RER.
O.Blanchard,
F. Giavazzi, &
F.Sa.
2005 “The US Current Account and the Dollar”
The required real depreciation of the dollar to eliminate the
CA deficit is in the range of 40 to 90%, depending on the
role of valuation effects.
M. Obstfeld & 2005
K.Rogoff
“The Unsustainable US Current Account Position
Revisited”
Stephen.Jen@morganstanley.com +44-20-7425-8583
A rebalancing of the CA requires 20-25% of TWI RER.
Please see important disclosures at the end of this report.
23
April 2006
Currency Economics
Explaining the US household saving rate
Actual and Fitted Values (1953Q2-2005Q2)
• US household saving ratio (S) can be
explained by three factors:
(1) household stock market wealth ratio (SE)
Percent
12
10
Fitted savings
rate
(2) household real estate wealth ratio (RE)
8
(3) US long bond yield (TB)
6
• Our estimation results suggest that:
4
1. The explanatory variables account for 80%
of the total savings rate variability during
the last 50 years.
2
US private
savings rate
0
-2
1953Q2
2. Savings are particularly sensitive to
housing wealth.
• Simulated Fed fund hikes along with gently
decreasing Household and Equity wealth
ratios would imply a positive saving rate
turn by end 2006.
1962Q2
1971Q2
1980Q2
1989Q2
1998Q2
Source: BEA, Morgan Stanley Research Estimates
“Fed Fund Hike” Along With Decreasing Residential
and Equity Wealth Scenario Simulation
Date
RE
SE
TB
S
2005Q4
2.201
0.661
4.65
-1.036
2006Q1
2.179
0.655
4.70
-0.738
2004Q2
2.157
0.648
4.95
-0.370
2006Q3
2.136
0.641
5.05
-0.059
2006Q4
2.114
0.635
5.25
0.284
Source: Morgan Stanley Research Estimates
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
24
April 2006
Currency Economics
The world is ‘balancing up’
1.1
1
0.9
US X/M
0.8
0.7
Q
1.
19
90
Q
1.
19
91
Q
1.
19
92
Q
1.
19
93
Q
1.
19
94
Q
1.
19
95
Q
1.
19
96
Q
1.
19
97
Q
1.
19
98
Q
1.
19
99
Q
1.
20
00
Q
1.
20
01
Q
1.
20
02
Q
1.
20
03
Q
1.
20
04
Q
1.
20
05
0.6
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
25
April 2006
Currency Economics
Biography
Stephen Jen is a Managing Director at Morgan
Stanley and serves as the Global Head of
Currency Research for the firm.
Prior to joining the firm, Stephen spent four
years as an economist with the International
Monetary Fund in Washington, DC,. In addition,
Stephen was actively involved in the design of
the IMF’s framework to provide debt relief to
highly indebted countries. Stephen has also
worked for the Board of Governors of the Federal
Reserve and the World Bank and has been a
lecturer at the Massachusetts Institute of
Technology and Georgetown University’s McDonough
School of Business.
Stephen holds a PhD in Economics from the
Massachusetts Institute of Technology, with
concentrations in International Economics and
Macroeconomics. He also earned a BSc in
Electrical Engineering summa cum laude from the
University of California, Irvine.
Stephen.Jen@morganstanley.com +44-20-7425-8583
Please see important disclosures at the end of this report.
26