1. KBank on Econ / FX / Rates
August 2011
by
Kobsidthi Silpachai, CFA
Capital Markets Research
1

2. S&P ก F ก ก ก FF F ก AAA ก
F F ก Fก F ก F ก F ก 2013 F ก
F F
ก ก F ก F F ก F ก ก F Fก F ก F F
ก F 7% F ก กก ก F ก
ก F F ก F ก F F ก F ก
F ก ก F ก F ก F F ก
F ก ก F F F F F ก F ก ก ก F F
ก กก F ก ( F FCY LCY)
ก F F F F กF ก ก
ก ก Fก ก F ก ก F
F ก 3.25% F ก F Fก F
F ก ก 2009 ก F ก F Fed / ECB F ก ก
2

3. QE3 F ก F QE1 QE2 ก F ก ก F ก ก ก ก F F
QE3 ก F ก F F ก F F ก F F ก ก 2013
F F กF F 2 F F
ก F F F F ก F F USD / THB
29.00 2011 28.00 2012 ก ก USD Fก
F F
ก ก F F ก กก F ก Fก
ก F F ก F Fก ก ก ... ก:
. GDP F = GDP
F F F GDP F F ก F ก ก F ก
F F F กก F GDP ก ก
ก ก
F . 4% ก ก ก F F ก
3

4. current 2010 1mth ago 3mth ago 6mth ago current 2010 CPI 1mth ago 3mth ago 6mth ago
2011e GDP 2011e
GDP CPI
AUSTRALIA 2.0 3.4 2.8 2.9 3.5 3.6 2.9 3.3 3.3 3.0
BRAZIL 4.0 7.5 4.0 4.1 4.5 6.2 5.0 6.2 5.5 5.0
CHINA 9.3 9.7 9.5 9.5 9.5 5.2 3.3 4.9 4.7 4.6
COLOMBIA 5.0 4.3 4.9 4.5 4.4 3.3 2.3 3.3 3.5 3.1
EUROZONE 2.0 1.7 2.0 1.7 1.6 2.7 1.6 2.7 2.5 2.0
FRANCE 2.0 1.5 2.2 1.9 1.7 2.1 1.7 2.2 2.3 1.9
GERMANY 3.4 3.6 3.4 2.8 2.5 2.3 1.2 2.3 2.3 1.7
GREECE -3.6 -4.0 -3.6 -2.9 -2.7 3.1 4.7 3.1 2.2 1.2
HONG KONG 6.0 6.6 5.4 5.3 4.5 5.0 2.4 5.0 4.5 3.7
HUNGARY 2.5 1.0 2.6 2.6 2.8 4.1 4.9 4.0 4.0 3.8
INDONESIA 6.5 6.0 6.4 6.4 6.4 6.0 5.1 6.0 6.8 6.7
IRELAND 0.5 -0.4 0.1 0.2 1.5 1.3 -1.6 1.3 1.2 0.9
ISRAEL 4.6 4.1 4.5 4.5 3.6 3.6 2.7 4.3 4.3 3.2
ITALY 0.8 1.1 0.9 1.1 1.1 2.6 1.6 2.5 2.4 2.1
JAPAN -0.7 4.3 -0.6 1.3 1.4 0.4 -0.7 0.4 0.0 -0.3
KUWAIT 4.4 2.8 4.4 4.5 3.9 4.5 4.1 4.5 4.7 4.2
MALAYSIA 5.0 7.0 5.5 5.5 5.1 3.3 1.7 3.0 3.1 2.8
MEXICO 4.2 5.2 4.2 4.1 3.7 3.6 4.2 3.7 3.7 3.9
PHILIPPINES 5.4 7.0 5.4 5.0 5.0 5.1 3.8 4.9 4.0 4.0
PORTUGAL -1.9 1.6 -1.4 -1.2 -1.0 3.4 1.4 3.7 3.4 2.0
RUSSIA 4.6 4.0 4.6 4.6 4.2 9.0 6.9 9.1 9.1 9.0
SAUDI ARABIA 5.6 3.8 5.6 5.7 4.3 5.5 6.0 5.5 5.6 5.2
SINGAPORE 6.0 14.9 6.0 5.2 5.2 4.5 2.8 3.2 3.2 3.2
SOUTH AFRICA 3.6 2.8 3.6 3.5 3.5 4.9 4.3 4.9 4.6 4.6
SOUTH KOREA 4.4 6.1 4.5 4.5 4.3 4.2 3.5 4.4 4.4 3.5
SPAIN 0.7 -0.2 0.8 0.7 0.6 3.1 2.1 3.1 2.8 2.1
SWITZERLAND 2.4 2.7 2.4 2.0 1.7 0.9 0.7 0.9 0.8 0.8
TAIWAN 5.3 10.4 5.2 4.7 N/A 2.0 1.0 2.1 2.1 N/A
THAILAND 4.1 7.9 4.1 4.5 4.5 3.8 3.3 3.8 3.8 3.4
TURKEY 5.4 8.1 5.3 4.6 4.6 6.6 8.6 6.5 6.3 6.3
BRITAIN 1.2 1.6 1.4 1.5 1.9 4.4 3.3 4.5 4.3 3.6
UNITED STATES 1.7 2.9 2.5 2.7 3.2 3.0 1.6 3.0 3.0 1.8
4

5. ก ก ก
5

6. ก ก
% yoy
15
10 ก 2.6%
2
5 ก:
0 C= +1.5%
G = +0.1%
-5 I= +0.9%
-10
Inv = +0.2%
X M = +0.3%
-15
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11
Private consumption Government Consumption Gross fixed capital formation
Inventory change Net exports GDP yoy
6

7. ก ก ก
7

8. ก ก ( F ก ก )
8

9. ก ก G7
This suggest that
G7 economies make reported GDP in 2H
15% about 50% of the world are likely to be 6%
economy negative 5%
10% 4%
3%
5% 2%
1%
0% 0%
-1%
-5% The G7 lead -2%
indicators have been -3%
negative for May and
-10% June 2011
-4%
-5%
-15% -6%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
G7 lead indicators (left axis) G7 GDP (right axis)
9

10. ก (OECD) ก
15% The lead indicators of the 15%
OECD countries (34 in
10% all) are nearly zero
10%
5%
5%
0%
0%
-5%
Thaksinomics helped us to avoid
-10% the global slowdown in 2002 /
-5%
2003, can we hope for a repeat?
-15% -10%
00 01 02 03 04 05 06 07 08 09 10 11
OECD lead indicator, % YoY, left axis TH GDP, % YoY, right axis
10

11. ก
11

12. y = f(x), F ก
US real GDP, 2005 dollars, bn
15000
13000 y = 141.07x - 1395.6
2
R = 0.9725
11000
9000
7000 OECD lead indicator
explains 97% of
historical moves in US
5000 GDP
3000
30 40 50 60 70 80 90 100 110
OECD lead indicators for US, index
12

13. ก F F
13

14. F ก ก
14

15. ก ก F 0.0%
15

16. F ก
16

17. F ก ก ก
17

18. ก ก ก
140
130
120
110
100
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
90
80
External sector/GDP, %
18

19. ก (OECD) ก F ก
15.0% 40%
10.0% 30%
20%
5.0%
10%
0.0%
0%
-5.0%
-10%
-10.0% -20%
-15.0% -30%
01 02 03 04 05 06 07 08 09 10 11
OECD lead indicator (left axis) Thai export volume, 3mth average, push back 6mths
19

20. ก (OECD) ก F
15.0% 60%
50%
10.0% 40%
5.0% 30%
20%
0.0% 10%
0%
-5.0% -10%
-10.0% -20%
-30%
-15.0% -40%
01 02 03 04 05 06 07 08 09 10 11
OECD lead indicator (left axis) Thai import volume (right axis)
20

21. F :
กก F (currency debasement)
21

22. 2011 S&P F .
F F '+ AAA/A-1
ก F ก ก F
ก ก F F F กก F ก
F F F F ก F
ก F 'AAA F F ก
ก ก ก กF F ก F F F
ก ก F
F Fก F F ก ก ก ก ก
ก 2013 F ก ก F F ก F F
ก F กF F 'AAA' F
22

23. กก ก ก กF ก F ก
23

24. F F ก
24

25. ก .
F F ก F 'AA +' ก'AAA'
'A-1+' ก Fก ก ก CreditWatch
ก F F ก F ก F ก ก
ก F ก ก
ก F F F F ก ก F F ก
F F F F ก F ก ก F F กก F
F ก Fก 18 2011
F F ก F ก ก F ก F F ก
F F F ก F ก F F
กF F
F ก ก F 'AA'
F F ก Fก ก FF F กF ก F ก ก ก
F F F กก F F
25

26. ก ก F... ก F?
26

27. 0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
United 16,000
States
China
ก
Japan
Germany
France
GDP, USD bn
United
F
Kingdom
Brazil
1
Italy
ก
Canada
India
27

28. F F F 1 F ก
30
25
20
15
10
5
0
US CH JP UK HK CA FR BR IN GR AU SW SK TW
share of world market equity cap, %
28

29. F 2 ก F
29

30. F กF F
30

31. กก ก ก Fก F F F
1000 -900
If we start from Jan
900 2000, the US has a -800
cumulative trade deficit -700
800 with Japan of nearly
USD 800 bn -600
700 -500
600 -400
…and Japan holds -300
500
about USD 912bn in -200
400 USTs
-100
300 0
00 01 02 03 04 05 06 07 08 09 10 11
JP UST holdings, left, USD bn cumulative trade deficit, right, inverted, USD bn
31

32. กก ก ก Fก
F ก
1400 If we start from Jan -2400
2000, the US has a -2200
1200 cumulative trade deficit -2000
with China of nearly -1800
1000 USD 2.1 trn -1600
800 -1400
…and China holds
-1200
600 about USD 1.159 trn in -1000
USTs -800
400 -600
200 -400
-200
0 0
00 01 02 03 04 05 06 07 08 09 10 11
CH UST holdings, left, USD bn cumulative trade deficit, right, inverted, USD bn
32

33. F F ก
UST holdings Japan
20.2%
Others
35.2%
China
Thailand 25.7%
1.3%
OPEC
5.1%Germany
Taiwan UK
1.4%
3.4% 7.7%
33

34. ก ก S&P F
34

35. F ก downgrade?
1.80
1.60
1.40
1.20
1.00
0.80
0.60 S&P downgrades Japan's AAA to AA+ on Feb 2001
0.40 …but yields goes down…..
0.20
0.00
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec-
01 01 01 01 01 01 01 01 01 01 01 01
BOJ policy rate, % 3mth JGBs, % 10yr JGB, %
35

36. ก ก F ก ก F
290
280
270 BOJ pumps more JPY into the system, post downgrade
260
250
240
230
Jan- Feb- Mar- Apr- May- Jun- Jul-01 Aug- Sep- Oct- Nov- Dec-
01 01 01 01 01 01 01 01 01 01 01
Japan M1 money supply, JPY trn
36

37. ... ก F
Japan M1 money supply, JPY trn
600
500
400
300
200
100
0
57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11
Japan M1 money supply, JPY trn
37

38. Debt monetization F F
... ก F
38

39. ก F ก
39

40. y = f(x), ก ก (M1) F ก
USD M1, USD bn
2200
y = 0.0808x + 695.84
2000 This is evidence of debt 2
monetization (converting
R = 0.9522
1800 it to money). The more
the US government
borrows, the more the
1600 Fed has to print money
1400
1200
1000
4000 6000 8000 10000 12000 14000 16000
US national debt, USD bn
40

41. y = f(x), F ก (M1) F ก
US CPI index
300
y = 0.106x + 44.462
250 2
R = 0.9397
200
150
100
50
400 600 800 1000 1200 1400 1600 1800 2000 2200
US M1, USD bn
41

42. กก F =
FกF F F F / ก F
7
6
5
4
3
2
1
0
-1
-2
-3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
10yr UST yield less inflation, %
42

43. +ก F =ก
FกF F F( ) ก F( )
8
6
4
2
0
-2
-4
-6
-8
-10
-12
00 01 02 03 04 05 06 07 08 09 10 11
FX return, CNY basis, % UST 10yr UST, % sum of yield and FX return
43

44. ก ก
44

45. ก ก EU ก
USD bn
1,000 PIIGS’ debt held by banks in other countries
800
600
400
200
0
Portugal Ireland Italy Greece Spain
France Germany UK US Other
45

46. F ก
46

47. Price to book ratio: SET Bank index, TH
3.50
3.00
2.50
2.00
1.50
1.00
96 97 98 99 00
0.50
0.00
Thai SET Bank index, price to book ratio
47

48. Price to book ratio: KBW Bank index, US
2.50
2.00
1.50
1.00
07 08 09 10 11
0.50
0.00
KBW Bank index, price to book ratio
48

49. Price to book ratio: Euro Stoxx Bank Index
2.50
2.00
1.50
1.00
98 99 00 01 02 03 04 05 06 07 08 09 10
0.50
0.00
Euro Stoxx Bank index, price to book ratio
49

50. ก F F F F ก กF ก 7%
%
8 Italy Spain Germany 7% line
7
6
5
4
3
The ECB is lending money to
2 Italy and Spain by buying its
bonds…or…it is recapitalizing
1 the EU banks
0
Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
50

51. ก กก F
3,000
ก F ก
QE 2
2,500
2,000 QE 1
1,500
1,000
500
-
02 03 04 05 06 07 08 09 10
Fed's balance sheet, USD bn ECB balance sheet, EUR bn
51

52. กF F ?
This is reflects the transfer
of burden from the tax
payer in the US / EU to us
Currency mismatch is the
main culprit…FCY
asset….LCY liabilities
52

53. F F กF กก ก ?
F
53

54. QE3 F F F FF F
QE1 ก F Fก F กF F ก F ก ก ก F F ก
ก F F ก
QE2 F F ก ก F ก F ก ก ก ก
ก F ก ก F F ก
ก F F กF ก FF ก Fก F F
ก ก ก ก 2013 QE3 ก ก กก F ก
กF ก ก2
F ก F ก F F F
ก F F 2009 กก F F F ก ก
ก/ ก
54

55. F ก ก
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
-
00 01 02 03 04 05 06 07 08 09 10 11
US excess reserves, USD mn
55

56. F ก ก ก F ก 7%
Fed Funds rate, %
3.00
2.75 3 2
y = -0.0494x + 1.3823x - 12.661x + 38.166
2.50 2
7% looks to be R = 0.9348
2.25
2.00 the thresehold
1.75 before a
credible The reverse path Fed Funds as a
1.50
reversal of function of unemployment rate
1.25
1.00 rising Fed
0.75 Funds
0.50
0.25 9.2
0.004.00 4.50 5.00 5.50 6.00 6.50 7.00
7.00 7.50 8.00 8.50 9.00 9.50 10.00
unemployment rate,%
56

57. ก ก F ก ก ก ก
4.5 10.0
4.0 9.0
3.5 8.0
3.0 7.0
6.0
2.5
5.0
2.0
4.0
1.5
3.0
1.0
2.0
0.5
1.0
0.0 0.0
2011 2012 2013 2011 2012 2013
Real GDP - Fed Real GDP - Consensus Unemployment - Fed Unemployment - Consensus
57

58. y = f(x), F ก (M1) F ก F
USD/THB
48
46
44
y = -0.0193x + 66.055
42
40 R2 = 0.9464
38
36
34
without Sept 2006 to Dec 2008 period
32
30
28
1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 2100
USD M1, bn
58

59. y = f(x), F ก (M1) ก
USD / troy oz
2000
1800
1600 y = 1.5239x - 1477.7
1400 2
R = 0.9022
1200
1000
800
600
400
200
0
1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 2100
USD M1 money supply, bn
59

60. F F ก ก Fก ก F F Gold standard
8000 1800
7000 1600
6000 1400
1200
5000
1000
4000
800
3000
600
2000 400
1000 200
0 0
59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
US M1 / US gold holding, USD per troy oz, left actual gold price, right
60

61. KBank USD/THB model
KBank USD/THB model
48
46
44 We still hold
onto our YE
42 target of 29.00
40
38
36
34
32
30
28
01 02 03 04 05 06 07 08 09 10 11 12
actual model
61

62. F FF F F?
62

63. y = f(x), F ก (M1) ก
TH CPI index
120
115
y = 0.0375x + 41.396
110 2
R = 0.9496
105
100
95
90
without Sept 2006 to Dec 2008 period
85
80
1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000
USD M1, bn
63

64. กก ก ก ก
TH CPI index
120
115 y = 0.0004x + 76.46
2
110 R = 0.9437
105
100
95
More exports to China more money in
90 Thailand higher inflation
85 Or less supply in Thailand higher
inflation
80
20000 30000 40000 50000 60000 70000 80000 90000 100000 110000
CH nominal GDP, CNY bn
64

65. F ก ก F ก ก 3.0%
65

66. . ก F ก ก 3.0% 4/54 1/55
Ranges: % 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13
>3 45.0 60.0 63.0 29.0 32.0 24.0 16.0 22.0
2.5 3.0 35.0 22.0 20.0 19.0 19.0 17.0 13.0 14.0
2 2.5 18.0 13.0 12.0 22.0 21.0 21.0 17.0 17.0
1.5 2.0 2.0 4.0 4.0 19.0 17.0 20.0 20.0 18.0
1 1.5 - 1.0 1.0 9.0 8.0 12.0 18.0 15.0
0.5 1.0 - - - 3.0 2.0 4.0 11.0 9.0
0 <0.5 - - - - - 1.0 6.0 5.0
F F
. F 215
240 F
66

67. F F F WTI Brent F F Dubai
140
130
120
110
100
90
80
70
60
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
WTI Brent Dubai
67

68. F F F
190 50
170 45
150 40
intervention, subsidies
130
35
110
30
90
25
70
50 20
30 15
10 10
00 01 02 03 04 05 06 07 08 09 10 11
Sing Gasoil, left Thai diesel, right
68

69. F F F
% YoY % YoY
80 UN FAO food index, left axis 10
TH CPI index, right axis (pushed back 4mths) 8
60
6
40
4
20 2
0
0
02 03 04 05 06 07 08 09 10 11 -2
-20
-4
-40 -6
69

70. . F 3.50% ... F ...
%
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
01 02 03 04 05 06 07 08 09 10 11 12 13
actual model
70

71. ก F
S&P ก F ก ก ก FF F ก AAA ก
F F ก Fก F ก F ก F ก 2013 F ก
F F
ก ก F ก F F ก F ก ก F Fก F ก F F
ก F 7% F ก กก ก F ก
ก F F ก F ก F F ก F ก
F ก ก F ก F ก F F ก
F ก ก F F F F F ก F ก ก ก F F
ก กก F ก ( F FCY LCY)
ก F F F F กF ก ก
ก ก Fก ก F ก ก F
F ก 3.25% F ก F Fก F
F ก ก 2009 ก F ก F Fed / ECB F ก ก
71

72. ก F
QE3 F ก F QE1 QE2 ก F ก ก F ก ก ก ก F F
QE3 ก F ก F F ก F F ก F F ก ก 2013
F F กF F 2 F F
ก F F F F ก F F USD / THB
29.00 2011 28.00 2012 ก ก USD Fก
F F
ก ก F F ก กก F ก Fก
ก F F ก F Fก ก ก ... ก:
. GDP F = GDP
F F F GDP F F ก F ก ก F ก
F F F กก F GDP ก ก
ก ก
F . 4% ก ก ก F F ก
72

73. 73

74. Supply & Demand 101,
our FX forecasting methodology
74

75. Money is the most basic commodity
What is interest rates? It is the price (appreciation rate) of local money versus time
What is exchange rates? It is the price of local money versus foreign money
What is inflation? It is the depreciation rate of money…opposite of interest rates
What determines the price of commodities…..local / foreign money?
What determines the supply of local / foreign money
What determines the demand of local / foreign money?
How do we estimate the target of the exchange rate?
75

76. Supply and Demand: Basics of Economics
Price of USD This is the basics of the pricing of any
Supply curve commodity
It is based on supply and demand
If you have the given supply and demand, the
price of USD will be priced at P1 for a quantity
P1 of Q1
Demand curve
Q1 Quantity of USD
76

77. Supply and Demand: Basics of Economics
Price of USD If the supply curve shifts…what happens?
Supply curve
The price is changed from P1 to P2 but the
quantity increases from Q1 to Q2
This is the case for the USD
P1
If the Fed cuts interest rates / trying to keep
P2 rates low, it is trying to increase the USD
money supply
…But why would the US Fed want to cut
interest rates or keep interest rates low?
Demand curve
Q1 Q2 Quantity of USD
77

78. Supply and Demand: Basics of Economics
Price of USD Not only that, demand for USD is weaker and
Supply curve the demand curve is to shift to the left
The USD will then be re-priced at P3 and Q3
Why is the demand for USD dollar falling?
P1
US import more than it exports…
P2
…therefore the US will demand more foreign
P3 currency to pay for its imports
…and other countries demand for USD is less
Demand curve since US import more than it exports
Q1 Q3 Q2 Quantity of USD
78

79. Balance of Payments Company Cashflows
Trade Balance Cashflow from Operations
+ +
Service Account Cashflow from Investing
= =
Current account balance Free cashflow
Private capital flows Change in debt
+ +
Public capital flows Dividends / new equity
= =
Capital inflows / outflows Cashflow from Financing
Balance of Payments Net cash flow
Forex reserves Cash equivalents
79

80. Our methodology for USD/THB forecasting
USD/THB USD/THB since
2001
48 50
46
y = -7.6484Ln(x) + 69.957
44 2
R = 0.8665 45
42
40
38 40
36
34 35 y = 27.698Ln(x) - 86.288
32 2
R = 0.7563
30
30
28
26
25 75 125 175 225 25
FX reserves to USD/THB mapping 70 80 90 100 110 120 130
FX reserv es,
current USD bn DXY
2011 forecast DXY to USD/THB mapping current
80

81. Cumulative current account & USD/THB
USD/THB
40000 29 48
30000 31 46
33
20000 44
35 y = -0.0003x + 37.314
10000 42
37 R2 = 0.7087
40
0 39
38
-10000 41
43 36 latest data point
-20000
45 34
-30000
32
01 02 03 04 05 06 07 08 09 10
30
TH current account cumulative, Jan 91 = base, USD mn, left
axis 28
-40000 -20000 0 20000 40000
USD/THB, right axis, inverted
cumulativ e current account balance, Jan 91 = base, USD
81

82. 82