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In this edition of Global Focus by Wells Fargo

 

World headlines

Dave Napalo, Head of FX Risk Management for Wells FargoFrom time to time, political debates overwhelm fundamental market forces that shape our expectations about the global economy. Read more

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From time to time, political debates overwhelm fundamental market forces that shape our expectations about the global economy. We find ourselves in the midst of one of those periods now, with the two-headed monster of the U.S. budget impasse and the need to raise the country's debt ceiling dominating the newswires. While we expect an eleventh-hour resolution to these issues that somehow allows both warring parties to save face, until its arrival, market conditions will be affected by the political winds that have stirred the marketplace.

United States

We left the second quarter of this year filled with anticipation about the Federal Reserve beginning to withdraw from its quantitative easing program. The term "tapering" became commonplace to capture the Fed's eventual weaning of the markets from its regular and substantial bond purchases to sustain a low interest rate environment. Despite a building consensus that the Fed would begin trimming its securities purchases late in the third quarter, the Fed surprised the market by announcing at its September meeting that it would maintain its existing pace of bond purchases. The Fed cited continued sluggish economic growth with inflation still remaining below the two percent target as its principal reasons for delaying the anticipated change to its monetary policy. With an easy money policy still in place, investors were cheered, sending the S&P 500 Index to a new closing high price of 1,725 on September 18th.

Investor enthusiasm, however, proved to be short-lived. Attention soon focused on the potential economic drag of the limited U.S. government shutdown and the financial market chaos threatened by a U.S. default on its debt obligations. With these looming concerns, the S&P 500, as a barometer of sentiment, quickly retreated to 1,655 before finding some solid footing.

The U.S. dollar and Europe

Against this backdrop, the two major currencies of Europe, the euro and the British pound sterling, have enjoyed sizeable gains against the U.S. dollar during the last quarter. From its low point in July of $1.2800, the euro (EUR) rallied to a recent high of just over $1.3600, for a recovery of 6.25%. The pound's (GBP) low to high rally was even more impressive, with a range of $1.4870 to $1.6200 equaling an 8.9% recovery. Both currencies benefited from the unchanged Fed policy announced in September.

Of the two, the GBP has a more robust posture. The pace of economic activity in the U.K. quickened in Q2, as GDP grew 0.7% quarter on quarter and 1.3% year on year. While Bank of England tightening of monetary policy appears to be some way off, the central bank seems comfortably on hold, with further monetary easing unlikely. In contrast, the Eurozone economic recovery has been more subdued. Further, the European Central Bank (ECB) remains distinctly more dovish with respect to its policy.

On balance, we are broadly neutral on the pound versus the U.S. dollar. The U.K. economy is enjoying a steady upswing, including a rise in confidence surveys toward multi-year highs. With FX positioning balanced and a limited economic and policy contrast between between the United Kingdom and the United States, we see little change in the pound versus the dollar over time. As for the euro, we expect softness over the medium term. Slow growth and a cautious ECB should lead to a weaker euro over time, especially given some build up in speculative FX long positions. However, it could take monetary policy action on either side of the Atlantic to trigger that decline, which looks more likely in 2014 than later this year.

The U.S. dollar and the rest of the world

While major currencies have fared well recently against the dollar, the story is not the same for emerging-market currencies, which have trailed their peers in advanced economies. At a time when U.S. manufacturing has been expanding at its fastest pace since 2011, developing-nation industrial output is at a four-year low. Although still growing at a comparatively robust rate of 7 to 8% per year, the Chinese economy has slowed sufficiently to reduce demand for everything from Brazilian iron ore to Malaysian palm oil. To use a phrase that was once applied exclusively to the United States, China sneezes and the rest of the world catches cold.

Two currencies that experienced a particularly wild ride through the third quarter were the Brazilian real (BRL) and the Indian rupee (INR). Brazil and India, like many other developing countries, have been finding it increasingly difficult to attract foreign capital to finance trade deficits. At the end of Q2, the BRL traded at a rate of 2.23 to the dollar, but experienced a rapid weakening that carried it to a mid-August low point of 2.4550, or 10% depreciation. Subsequently, Brazilian monetary authorities invoked aggressive measures to restore the currency's value. The Central Bank of Brazil announced a program to sell USD via swaps and repos on a daily basis through year-end that broke the trend of BRL depreciation. That step was augmented when the central bank's Monetary Policy Committee tightened interest rates via the benchmark overnight rate (Selic) with a 50 basis points increase to 9.5% on October 10th. This tightening comes as inflation continues to test the top of the range near 6% annually.

Despite the recovery, the BRL is not out of the woods. Economic fundamentals continue to struggle. Industrial production is stagnant and Brazil is running a large current account deficit that continues to climb. The currency has been aided by a modest return of the carry trade (borrow in USD, convert and invest in BRL unhedged, earning the interest rate differential). U.S. uncertainty surrounding the government shutdown and the debt ceiling has benefited the BRL recently in line with other emerging market currencies. However, our outlook is that BRL asset positions are good candidates for hedging at levels stronger than 2.20 to the dollar. Local elections are coming up next year in Brazil and the government will want to promote growth locally. In order for that to happen, the BRL needs to weaken.

A similar story applies to the INR. After ending June trading at around the level of 60 to the dollar, the currency weakened by a stunning 15% in less than 60 days. While it has recovered back to the 60 range once again, the currency faces a toxic mix of economic fundamentals: a weakening GDP, accelerating inflation, a deteriorating current account balance, and a reduced flow of foreign capital inflows. Similarly, monetary authorities are constrained. While an interest rate reduction would help the flagging economy, it would also discourage foreign capital inflows. Finally, India currently has the lowest foreign exchange reserves of all emerging markets, giving the government only a small war chest with which to protect itself against severe currency depreciation. The syndrome of higher inflation and weakening growth is a challenging mix that requires structural reforms before a country can achieve a relative degree of stability from its currency. Until India faces these hard choices, we expect the currency to remain under pressure well into 2014.

Ask the expert

RMB payment strategies for corporationsJoanne Strobel, market consultant for Wells Fargo Global Payment Services, describes challenges businesses face when implementing and identifying new opportunities and payment strategies using the Renminbi. Read more

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Question: What types of challenges do businesses face when implementing and identifying new opportunities and payment strategies using the renminbi?

Answer: The internationalization of the renminbi (RMB) has continued to make great strides since the introduction of the pilot program in 2009 when only registered Chinese companies could settle trade in the currency. Now for the first time in modern history, Chinese businesses can settle trades in their home currency. This development has arguably been the most significant change in the financial market since the introduction of the euro. In the United States, there was barely a mention of the internationalization of the RMB in the media. Lack of attention paid is now costing American businesses millions of dollars annually. In 2011, Western Union Business Solutions conducted a survey of more than 1,000 Mainland Designated Enterprises (MDEs) to ask about their preferences in cross-border payments.

There were three main questions:

  1. What is your preferred settlement currency?
    Nearly 40% of respondents preferred to receive the RMB versus 27% choosing the USD.
  2. Do you incur costs when receiving payments in a foreign currency?
    A full 74% said they experienced additional costs.
  3. Do you add additional fees to your invoice to account for foreign exchange risk?
    Those who admitted to adding a surcharge of some kind added an average of 3% on each invoice.

This means that American businesses could be paying 3% more on all of their imports from China. That's an additional $30,000 lost to China for every $1 million in imported goods. In October of 2012, the People's Bank of China (PBOC) was quoted as saying that importers could save between 2% and 3% by paying in RMB (SWIFT Whitepaper on RMB internationalization). A message such as this from the central bank of a country should make any business dealing with China reassess its business case on paying in RMB.

When implementing and identifying payment strategies for your business, the first step to consider is finding a financial service provider who is experienced with transacting in the offshore and onshore RMB. The second step is to reach out to their Chinese counterparts to inform them that they're able to pay trade invoices for goods in the RMB. After confirming with their counterparts that they prefer to receive payment in RMB, the U.S. business can then negotiate down the invoice fee leveraging the fact that there is no longer a need to account for exchange rate fluctuation.

As one of the leading providers of global payment services to corporations, Wells Fargo has a large and growing presence to meet the needs of our global customers. With the growing demand in RMB cross-border settlement, we recognize the necessity of offering a range of onshore and offshore RMB payment solutions. Please consult your relationship manager for further information on making payments in RMB.

Joanne Strobel is a market consultant for Wells Fargo Global Payment Services. She is based in Summit, NJ and can be reached at joanne.stobel@wellsfargo.com.

In the spotlight

Wells Fargo International Group team members give 24 hours of service worldwideWells Fargo team members in several countries gave their time and talents to improve their local communities during the first annual 24 Hours of Service event on September 17. Read more

Photo of Jillian Bales

Wells Fargo team members in several countries gave their time and talents to improve their local communities during the first annual 24 Hours of Service event on September 17.

The initiative, part of the Wells Fargo Community Support & United Way Campaign, which takes place annually in September, saw nearly 100 team members across 15 offices from around the world out in their local communities volunteering at soup kitchens, sorting school supplies, building homes, and working with at-risk youth.

"Uniting together for one day of service is a great way to showcase the charitable work that's being done in the communities where we have offices throughout the world," shared Jillian Bales, 2013 Global Banking Community Support Campaign co-chair and creator of the event.

Here's a quick snapshot of the day's events:

Singapore: Kicking off the 24 Hours of Service event, team members in Singapore joined together to volunteer at the Willing Hearts Soup Kitchen, a nonprofit organization that serves underprivileged and marginalized people in Singapore. Overall, the team prepared more than 2,000 meals for those in need.

Team members in Singapore smile for a photo in front of Willing Hearts Soup Kitchen.
Team members in Singapore smile for a photo in front of Willing Hearts Soup Kitchen.

Melbourne: Wells Fargo's senior relationship manager in Melbourne spent the afternoon at McAuley Community Services for Women, a local organization that provides needed services for women and children who are escaping family violence and for those who are homeless.

Mumbai: Team members in Mumbai spent the morning with children at the Don Bosco Home for Children, event sponsoring a special lunch. Despite coming from various backgrounds, the children happily shared their favorite movies, sports stars, and role models with the Wells Fargo team.

"The children have clearly seen a harsh side of life but are still young so we felt it was important that we give them something which helps them remember the importance of 'hope' and 'finding oneself.' We sponsored today's lunch for the children, which was met with great enthusiasm as it included their favorite chicken dish. We sometimes overlook the joys a simple meal can bring!" shared Nicholas Lobo, Global Banking relationship manager based in Mumbai.

Frankfurt: Team members in Frankfurt helped provide maintenance to the SOS Children's Village, an international nonprofit that protects the rights of children.

London: Team members in London spent the day volunteering with Habitat for Humanity, an international organization dedicated to providing decent and affordable housing to low-income individuals and families.

"It was such a great day and there was such a great story behind the house we were working on," shared Becky Stevenson, Global Banking relationship manager based in London. "Wells Fargo is very involved with Habitat for Humanity projects in the U.S., so it was so great to bring that same enthusiasm to London. Our team is really looking forward to working with the organization again soon!"

Dublin: In Dublin, team members volunteered for the annual soup run for the Simon Community, an organization dedicated to tackling homelessness in Ireland.

"Some of the people we met were very keen to chat and I think part of it was to talk to a friendly face and to be acknowledged — which is just a basic human need. I remember a college lecturer talking about the economics of birth — and how fate plays such a large part in the opportunities and life you will lead. Thankfully, the Simon Community is supporting those who may have got dealt a very tough hand," shared Caroline Wharton, Global Banking senior relationship manager based in Dublin.

Atlanta: Team members in Atlanta participated in activities to support Crossroads Kitchen, a local nonprofit that provides more than 60,000 meals to more than 3,900 homeless men, women, and children in the city. Furthermore, the organization helps people to acquire birth certificates, state IDs, and mailing addresses to qualify for social security, food stamps, and other programs.

Team members in Atlanta are all smiles while volunteering at Crossroads Kitchen.
Team members in Atlanta are all smiles while volunteering at Crossroads Kitchen.

Charlotte: Team members spent three hours in the morning packing school supplies at Classroom Central. During that time, the team managed to sort through more than 2,000 items ranging from backpacks to pencils. It was very evident that an organization like Classroom Central relies heavily on great volunteers to fulfill its mission in providing school supplies for children from low-income families in Charlotte.

Miami: Team members in Miami were actively involved at Camillus House preparing meals for those in need. The organization has provided humanitarian services to the indigent and homeless of Miami-Dade County for more than 50 years.

Philadelphia: Two events took place in Philadelphia. A Global Banking team volunteered at the local food bank, Philabundance, and Wells Fargo's Global Banking Consultant in Philadelphia spent the afternoon supporting Alex's Lemonade Stand Foundation, an organization that raises money to fight childhood cancer.

Minneapolis: The Minneapolis team volunteered at Feed My Starving Children, a local nonprofit that prepares meals designed to save the lives of severely malnourished and starving children. In just two hours, the team packed enough food to feed approximately 41 children for one year. The meals will be shipped to relief operations in Haiti.

Houston: Team members headed over to the Houston Food Bank where they spent two hours preparing more than 300 meals for people staying at local homeless shelters.

San Francisco: Team members in San Francisco spent the afternoon at the local Food Bank where they sorted and packed food that will be distributed out to the surrounding communities.

Seattle: Team members in Seattle awoke early to head over to the United Way of King County's Resource Exchange where they spent the morning providing needed services to underprivileged and homeless people.

"It was such a humbling experience to meet these wonderful people, as they shared their experiences of lost jobs — lost homes — some have lived on the streets for years, yet they arrived with a sense of pride and a hope for a better tomorrow. I'll always remember this day, and hope that Global Banking's 24 Hours of Service will become a regular part of Global Banking's community support campaign," shared Judy Long, Global Banking administrative assistant based in Seattle.

Orange County: Team members spent time at the Project Access Resource Center in Santa Ana, Calif. where, as part of an after school program, they helped tutor 15 elementary and middle school students in math, science, and language arts.

Los Angeles: Finishing up the 24 hour shift, team members arrived at the LA Regional Food Bank where they sorted and packed more than 665 bags of fruit that went to underprivileged children. In addition, the team sorted nearly 3,000 cans of food which will be sent to local food banks, churches, and other nonprofit organizations.

Team members in Los Angeles smile for a photo while volunteering at the LA Regional Food Bank.
Team members in Los Angeles smile for a photo while volunteering at the LA Regional Food Bank.

The 24 Hours of Service event generated more than 380 volunteer hours and touched even more lives all around the globe. "I am immensely proud of every single participant for their commitment to making a difference in the lives of those in their local communities," shared Bales. "This is a new tradition and I look forward to seeing it grow in years to come!"

For the third year in a row, United Way Worldwide named Wells Fargo's annual Community Support & United Way Campaign the No. 1 Giving Campaign. With more than 9,000 stores and more than 270,000 team members worldwide, it's virtually impossible today to know where our company's business ends and the needs of our communities begin. We invite you to learn more by reading our Corporate Social Responsibility Report.

People power

Nicholas Lobo, a Global Banking relationship managerNicholas Lobo, an optimist with a love for good food. Read more

Photo of Nicholas Lobo

Nicholas Lobo, an optimist with a love for good food

Always eager for an adventure, Nicholas shares, "I feel proud to be a part of the international expansion happening here at Wells Fargo. I find it motivating to be a part of a team that is at the frontlines in growing the bank's boundaries."

Since coming on board in 2012 as a Global Banking relationship manager covering the corporate market in India, Nicholas has worked closely with several offices in the U.S. to help build relationships with both Indian-based subsidiaries of U.S. companies and Indian multinationals with a U.S. presence. "My career choice to become a relationship manager has been rewarding. My role requires me to understand what is best for the customer and offer practical suggestions and solutions," Nicholas shares. "In turn, I've found that my overall attitude towards life has been positively impacted as well."

While Nicholas may have found his niche in corporate banking, his childhood aspiration was to become a doctor and save lives. When he's not at work, you might find him watching movies, trekking, swimming, reading novels, or even traveling throughout Southeast Asia. He also enjoys entertaining friends and family. "You will always find me in a good mood if I am around great food!" he jokes.

An optimist by nature, Nicholas' motto for life is simple. He imparts, "Life is full of wonderful surprises if you keep an open mind and a positive attitude."

Cristina Holderness, an International Treasury Management sales consultantCristina Holderness, a first generation Greek-American with a passion for family. Read more

Photo of Cristina Holderness

Cristina Holderness, a first generation Greek-American with a passion for family

Cristina Holderness is a Georgia native and first-generation American. She maintains her close Greek family ties by living in a three-generation household and speaking Greek with her family. "My family could be a reality show!" she says of her close-knit family.

After earning a degree in finance, Cristina worked for Allstate as an insurance agent — which apparently involves a lot of golf. When asked why she left Allstate, she responded, "I stink at golf!" From there, Cristina made a career shift to banking, working at Bank of America as a relationship manager, overseeing a portfolio of more than 100 businesses. She began her Wells Fargo career four years ago in a similar role as a Business Banking relationship manager before transitioning to Treasury Management as a sales consultant nearly three years ago.

In early 2013, Cristina took her skills and passion for Treasury Management to the global realm in our International Treasury Management group where she commutes from her home in Georgia every week to visit her customers in Florida. In her role, she's determined to make a difference for customers by advising them on the best products and solutions that will not only meet their needs but hopefully help create cash-flow efficiencies. She does this by gaining a strong understanding of her clients' business and processes before providing them with recommendations.

If Cristina wasn't working in banking, she would take her advising skills to an entirely different field — interior decorating! But her true passion lies with her family, her husband and two sons, ages 5 and 7. Cristina has learned a lot about herself through raising a son with special needs and she offers this advice: "Appreciate the little things, like having the ability to make friends, and don't take everything too seriously. Work hard, but you need to have fun too."

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For comments or questions about this newsletter call International Connections at 1-877-593-2468 or send an email to Lindsay Seymour at Lindsay.Seymour@wellsfargo.com.

General disclosures

The views expressed are intended for Wells Fargo customers only. They present the opinions of the authors on prospective trends and related matters in foreign exchange markets and global markets as of this date, and do not necessarily reflect the views of Wells Fargo & Co., its affiliates and subsidiaries. Opinions expressed are based on diverse sources that we believe to be reliable, though the information is not guaranteed and is subject to change without notice. This is not an offer to sell or the solicitation to buy or sell any security or foreign exchange.