1

What are the key drivers of the USD? • Fed hike expectations

• WTI and other commodity prices

• Further easing by ECB, BoJ & PBOC

• Challenges facing Europe, Japan & China

• November elections

• Unique macro environment

2

USD and the Fed

• Employment growth suggests it is time to hike

• Even though participation is too low

• And wage growth mediocre

• Inflation moving towards 2%

• But goods prices inflation is around 0%

• Usually the Fed plays little attention to overseas

• But this time is different as they continue to struggle

• Is the Fed and USD stuck in a loop?

• With hawkish comments driving a stronger USD and

weaker commodity prices

• Thereby hurting both the US and overseas

• Historically, Fed hikes have not been USD bullish

• Because other countries recovered more quickly

No pricing power in the goods sector, but

services prices rising with labor costs

Lower and slower for longer

3

USD Strength and Tighter Financial Conditions

• A stronger USD hurts U.S. growth through

several channels

• Weaker exports is one example

• A second is weaker overseas earnings,

which impacts employment, the equity

market, and so on

• Equity market already struggling

• With tepid earnings growth

• Stretched multiples

• Margins squeezed by higher labor costs

Earnings growth is flat to slightly negative

Overseas earnings face huge headwind

Rising labor costs a big threat to margins

4

USD driven by WTI and CRY (similar for MXWO)?

Is the common driver growth expectations, or is the relationship due to inflation, or earnings?

USD being driven by CRY (global growth proxy?) Global equities also being driven by CRY (and WTI -- above)

USD and WTI

have recently

parted paths

El-Erian argues there are four categories of countries • Leaders: USA, UK, India • Laggards: Europe, Japan • Rebalancing: China • Wild cards: Greece, Brazil, among others

Does this suggest longs in USD, GBP & INR vs. EUR, JPY & CNY?

EM FX: Key issue is Chinese rebalancing and what that means for commodity prices

5

Tepid Growth in Most Other Countries: Major Obstacle for Fed Hikes

Chinese capex driving commodity prices EM equities driven by CRY (i.e., global growth?)

6

EUR: Centrifugal vs Centripetal Forces

The look of love

Low interest rates crush banks' NIMs European growth trajectory well below pre-GFC trend

• Only 29% of Japan's 300 largest firms

(by market cap) have been created since

the 1960s, compared to 79% in the U.S.

• Most big companies in the U.S. were

established in the 1980s, 1990s & 2000s.

• Japan lacks the economic dynamism of

the U.S. where small startups can more

easily grow into big efficient companies

7

BoJ meets on June 16: Will helicopter money be on the table?

JPY and Nikkei: Joined at the hip Low interest rates crush banks' NIMs, everywhere

The wrong model: Japan refusing to rebalance

8

China: The Will and the Wallet – Is that enough or will it follow Japan's playbook?

Refusal to allow failures is crushing productivity

Soaring corporate debt – This movie always ends in tears Enormous rebalancing challenge: Japan flubbed it

9

Emerging Markets

Globally, 70% of new large companies will be in EMs

EM FX: Value trap? Cheap for a reason?

EM FX: Driven by commodity prices (and hence, China)

Source: Strategas 10

November: Huge implications for markets, but will they deliver on their rhetoric?

11

Extreme pricings: Equities, bonds and spreads

Stretched multiples (especially equities that look like bonds) 10Y bond yields remain at post-GFC lows

HY spreads moderate outside of energy Fixed income investors like bonds that look like equities

12

USD: Four observations

Non-commodity default rates have not risen

Range bound equities until inflation normalizes? Low 10Y yields due to copper prices (i.e., global growth)