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In this edition of Global Focus by Wells Fargo


World headlines

Dave Napalo, Head of FX Risk Management for Wells FargoThe events of the second quarter of 2013 produced a number of interesting developments on the global scene. Read more

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The events of the second quarter of 2013 produced a number of interesting developments on the global scene. Market participants seized upon statements and policy actions from central bank authorities with unusual vigor, as if the market had been waiting collectively for an impetus to reassess underlying positions and outlooks. The events also illustrated just how interconnected markets have become, as a movement in one market had ripple effects upon others.

United States

By far, the most significant development within the past quarter was the increased market focus on a possible shift in the Federal Reserve's policy stance. Fed Chairman Ben Bernanke's mere hint of a continued gradual improvement of the economy, with the suggestion that at some time in the future the program of quantitative easing would wind down, sent markets into a tizzy. The term "taper," used to describe the Fed's withdrawal from quantitative easing, has become commonplace in financial commentary. The benchmark ten-year Treasury yield promptly spiked from around 2.2% to 2.31%, the highest level since March 2012. Since the mid-June Fed announcement, the ten-year yield has ground even higher, reaching a yield as high as 2.74%, before settling around 2.50%.

Panicky conditions in the fixed income market rapidly spilled into the equity market. From an all-time high close of 1,651.81 in the S&P 500 on June 18, the index experienced a rapid decline to 1,573.09 only four trading days later, or a 4.8% adjustment. Investors trampled the conventional notion that fixed income and equities are inversely correlated as they rushed for the exits in both markets. The potential for higher rates depressed bond prices as bond holders took profits or shortened duration in anticipation of an actual increase in interest rates. Equity investors, fearful of the drag interest rate increases might have on a still sluggish domestic economy, also took profits as they moved to a more defensive posture. From the recent interim low, the S&P 500 has recovered to the mid-1,600 level, retracing about half the ground lost in the rapid initial downdraft of the index.

The focus on the Fed's policy outlook is likely to persist over the coming months. While the market will continue to look for signs of tapering, inflation remains low. With the PCE deflator in the 1.0-1.5 percent range, inflation remains comfortably below a level that would create concern for the Fed. The release of June unemployment numbers points to a labor market that is improving, but still at a very moderate, cautious pace. We foresee moderate economic growth in the U.S. over the balance of the year in the 2% range, with a probable pickup in growth in 2014.

The U.S. dollar and world currencies

The market's swift and sudden reaction to a possible change in Fed policy had an immediate impact on foreign exchange relationships throughout the world. Commodity and emerging market currencies were particularly vulnerable. While substantial corrections of many currencies were already well in place by the time of the Fed's announcement on June 19, the somewhat more optimistic U.S. economic outlook proffered by the Fed accelerated the rate of decline for several of the risk-sensitive currencies of the world. For example, on an intra-quarter basis the Mexican peso experienced a decline of 11.6% from its absolute high value to its low. In a precipitous fall in value that occurred after May 1, the Indian rupee depreciated by 12.8%. With similar timing to the rupee, the Brazilian real skidded 14.6% from its high to low value. On the other side of the world, the resource sensitive Australian dollar (AUD) depreciated 13.3%. In that case, the decline was accelerated by an unexpected cut in the cash rate by the Reserve Bank of Australia (RBA) to 2.75% — a rate even lower than where it was during the worst of the global recession in 2009. The RBA noted that global growth continues below trend — and with deteriorating fundamentals in the domestic economy, the rate cut would appear to be preemptive against a further stall in growth. After a rise in the value of the AUD of nearly 25% since late 2010, the RBA undoubtedly has an eye on the exchange rate and welcomes a decline in demand for its currency in order to keep it competitive on the global stage.

During the second quarter, the euro (EUR) and Japanese yen (JPY) were largely range-bound. The range for the quarter for the EUR was from 1.2800 on the low side to a high of 1.3392. With the rapid decline in value of the JPY already in place by the end of the first quarter, the currency traded from a high of 93.23 to the dollar to a low of 103.21. With the announcement of constructive results from June's U.S. unemployment report, a further weakening of the currencies is underway. Over the medium term, we expect the EUR to fall on Eurozone economic underperformance and the JPY to fall on Bank of Japan's aggressive monetary easing. To the degree that the market perceives some further degree of monetary policy divergence — in terms of relative dovishness — between the Fed and its European and Japanese counterparts, the chance for an accelerated depreciation of the core major currencies becomes more likely.

Global commodities

The global reassessment of asset prices has spilled into the commodity world, most notably in the value of gold. In three months, investors in gold have lost approximately 23%, with even worse losses resulting from investments in silver. From its peak in 2011, in which gold eclipsed $1,900 an ounce, it has fallen to trade just above $1,200 per ounce. Investments in gold or silver mining stocks have fared no better. The Market Vectors Gold Miners fund (GDX) lost 35% in the second quarter and 46% since the beginning of the year.

In its traditional role as a hedge against fear, gold surged following the financial crisis of 2009. Money poured into precious metals as investors feared that the Fed's cure for the recession would ultimately cause hyperinflation and undermine the value of the dollar. No end of provocative TV and radio ads painted doomsday scenarios about an imminent financial apocalypse.

However, as of late, multiple factors have painted a more constructive world economic picture. While far from out of the woods, Europe's financial crisis has relaxed. Inflation in the U.S. and around the world has remained benign, and if anything, lingering fears of deflation persist among the major economies of the major G10 countries. Finally, the anticipation of higher interest rates in the U.S., coupled with lower oil prices and a strong dollar create an environment that runs counter to the usual reasons for buying gold. Going forward, gold should continue to provide a useful barometer of the potential for a non-inflationary recovery in the global economy.

Ask the expert

How is the trade relationship between the U.S., Mexico, and Latin America evolving? Have we seen any interesting trends between Asia and the Americas?Nelson de Castro, senior vice president and head of Trade Sales USA for Wells Fargo International Trade Services, answers the questions. Read more

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Question: How is the trade relationship between the U.S., Mexico, and Latin America evolving? Have we seen any interesting trends between Asia and the Americas?

Answer: The trade relationship between the U.S., Mexico, and Latin America continues to evolve positively. Bilateral trade between the U.S. and Mexico remains robust — estimated at more than $500 billion annually. This is a large number and a bright spot for both countries. Ultimately, the trade relationship between the U.S. and Mexico may become more complex as the Mexican market continues to specialize in specific economic sectors linked to the U.S., including the automobile, energy and aeronautical industries.

Additionally, intra-Latin American trade is clearly growing in importance, with exports out of Argentina, Brazil, Chile, Colombia, Mexico, and Peru having grown considerably in the past 20 years from $18.7 billion in 1992 to over $147 billion in 2011. A similar trend is also true for the total volume of imports from the same Latin American countries, who have managed to increase their imports from $16.5 billion in 1992 to $128 billion in 2011. Mexico is also working on its entry into the Integrated Latin American Market (MILA), the second largest stock exchange in Latin America behind Brazil, which currently integrates the stock exchanges of Chile, Colombia, and Peru.

An interesting trend that we have also been following is the trade flow between Brazil and Asia. In just the past decade, Brazil has increased its exports to Asia by 1064% from $7.6 billion in 2001 to $89.2 billion in 2011. A similar trend is also seen on the import trade volumes from Asia to Brazil, growing from $10.2 billion in 2001 to $76.3 billion in 2011.

In fact, Latin America in general has emerged as a key international trading partner, having developed a well-established trade relationship with Asia. This is especially true for Brazil, Chile, Mexico, and Peru. As these trade flows continue to grow in importance, trade agreements have and will continue to play a considerable role in international trade. In addition to the North American Free Trade Agreement (NAFTA), which has now been in place for over 15 years helping North American companies increase trade flows, the Trans-Pacific Partnership (TPP) agreement is another trade agreement currently being negotiated by select countries, including the U.S., Australia, Brunei Darussalam, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. TPP is important given the access it offers to Asian markets. This access is of top priority as Mexico seeks to deepen its relationship with Asia, where, as Mexican President Nieto stated, "some of the most dynamic economies are located and have become a real engine of growth and innovation."

With that said, some manufacturing is beginning to relocate from Asia to Mexico and the U.S., while manufacturers in Europe, Japan, and South Korea are also considering relocating to the Americas. With Mexico being viewed as a gateway into the U.S. market, the steadily rising cost of doing business in China is also contributing to the growing manufacturing shift. In 2005, China's productivity-adjusted manufacturing wage advantage over Mexico was $1.20 per hour. By 2010, China's advantage had narrowed to 34 cents, and a recent study projects that Mexico will hold a wage advantage over China by up to $1.75 by 2015. Salaries in China have been rising, shipping costs continue to increase, and the appreciation of the yuan makes exported goods more expensive, naturally. If the trend continues, Mexico is well-positioned to be a significant winner in the re-shoring movement to the Americas.

Nelson de Castro is a senior vice president and head of Trade Sales USA for Wells Fargo International Trade Services. He is based in Chicago and can be reached at

In the spotlight

Confirmed letters of creditSelling overseas can raise a variety of concerns with respect to timely payments. Read more

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Selling overseas can raise a variety of concerns with respect to timely payments. Perhaps you sell to countries with a higher risk of social, political, or financial instability, or you're concerned about the creditworthiness of a bank issuing a letter of credit (L/C) and its ability to honor your conforming drawings. In most cases, Wells Fargo can eliminate these risks by adding its confirmation to an irrevocable L/C. Instead of waiting for reimbursement from your buyer's bank, Wells Fargo adds its backing to honor your conforming drawings. If the buyer's bank fails to make payment when due, we make the payment to you, provided that the documents presented comply with the terms of the L/C.

A confirmed L/C costs a little more because Wells Fargo has added its own irrevocable commitment to you, and in most cases, the confirmation fees would be for your account. The payoff, however, is in security and efficiency. We can quickly assess banks that have not already been analyzed, and when necessary, arrange a confirmation through the Export-Import Bank of the United States under their insurance program for countries with higher risk profiles.

How you benefit

  • Minimal risk of nonpayment. With an irrevocable L/C naming your company as the beneficiary, you shift payment responsibility from your customer to your customer's bank. Wells Fargo can add a confirmation to your L/C to eliminate any concerns about the creditworthiness of the overseas bank.
  • Faster payments. With export L/Cs advised by Wells Fargo, you can count on receiving payment quickly. To accelerate payment even further, you can use our ExportExpress service. ExportExpress will credit your account within 24 hours for payments under sight or usance payment L/Cs advised by us.
  • Government assistance. Our structured trade finance experts can help you navigate the maze of government export support programs and select one that works best for you.
  • Reliable document preparation. You can depend on accurate, discrepancy-free documents professionally prepared through our Document Express service.

A confirmed, irrevocable L/C can be a great tool for reducing risk when you have concerns about your buyer, their bank, or the country in which they operate. For more information about confirmed letters of credit, please contact your relationship manager or sales consultant, call International Connections at 1-877-593-2468, or email us at

People power

Lucy Wu, a relationship manager for Wells Fargo Global BankingLucy Wu, a Taiwanese native with a passion for international banking. Read more

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Lucy Wu, a Taiwanese native with a passion for international banking

Born and raised in Taiwan, Lucy describes her homeland as "a small but beautiful island with the friendliest people." And while she is well-traveled, Taiwan is the only place that she's ever called home.

After completing her master's degree in finance, Lucy began her career in banking with Bank SinoPac, where she held roles as a mortgage loan relationship manager, wealth management consultant, and corporate banking relationship manager. She then joined HSBC as a relationship manager responsible for covering subsidiaries of multinational companies in Taiwan. "Going from a local bank to an international bank was full of change and surprises, especially in my first few months," Lucy shares. "That said, that experience provided me with the international knowledge and expertise to help local clients. I am very thankful for the training opportunities that have been made available to me. All of my experiences have provided me with a strong fundamental knowledge of banking."

Now working as a relationship manager for Wells Fargo Global Banking, Lucy is focused on building relationships with Taiwanese corporations with a presence in the U.S. She also partners closely with 14 sales offices in the U.S. to provide seamless coverage for U.S. customers with operations in Taiwan. "Banking in Taiwan is one of the most competitive industries, and local banks generally provide the exact same products to clients." Lucy adds, "I joined Wells Fargo because I wanted to distinguish myself from the competition. In addition to helping clients with their local banking needs, I can also work with them to accommodate their needs outside of Taiwan."

Lucy further adds, "My favorite part of my job is talking with people and sharing my knowledge. I especially enjoy the process of finding a solution, which may involve bringing in specialists from other areas of the bank. Working together as a team to do what's best for the customer is exciting and is what gets me up in the morning."

So what does Lucy do when she's not out finding banking solutions for her customers? You can find her reading, listening to pop music, or watching crime dramas and science fiction films. "If I weren't a banker, I think I'd be a crime scene investigator," Lucy reveals. "When I'm watching these shows, I just let my imagination fly!"

Ramon Espinosa, head of Foreign Exchange Quantitative ResearchRamon Espinosa, a family man with a love for music and sports. Read more

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Ramon Espinosa, a family man with a love for music and sports

Hailing from Palo Alto, California, Ramon has spent most of his life on the West coast. "My father and grandfather were professors at Stanford, so I grew up on campus," he shares. "My elementary school, which is no longer there, was actually right in the middle of campus!"

After graduating from university, Ramon spent a few years out East before finding his way back to his Californian roots. "My first job after college was at the Congressional Budget Office (CBO) in Washington, D.C. Because this was only a few years after the Watergate scandal, it was an exciting time to be in Washington," states Ramon. "In many ways, the CBO was like working for a start-up — well, as much as a place filled with accountants and economists can feel like a start-up."

After spending three years at the CBO, Ramon went on to study at Princeton University, earning his PhD in economics and landing a position as an assistant professor at Boston University, then as a research economist at the Federal Reserve Bank of New York. "I loved the Fed and living in New York, but when my wife was transferred to San Francisco, it gave me the opportunity to return home."

Now, as part of Wells Fargo's Foreign Exchange Risk Management Group, Ramon helps customers measure their exposure to currency risk and identify effective strategies for managing these risks. "I enjoy that every day brings something new, and that I have the opportunity to work with a diverse range of businesses and interact with bright and engaging clients and colleagues."

Along with an exciting education and career background, Ramon is a devoted family man. When asked what he considers his biggest accomplishment, Ramon answers, "I would have to put my family at the top of the list. Convincing a wonderful woman to marry me — and stay married for 30 years — and then watching our children grow into great adults has been tremendously gratifying for me."

Outside of work, you can find Ramon cheering on his favorite sports teams or listening to music, "I'm a pretty rabid fan of Stanford, any team playing against Cal, and all San Francisco teams — and I have pretty varied musical tastes, anything from classical to bluegrass," he adds.

As for imparting words of wisdom? Ramon lives by the golden rule, "Treat others as you would like to be treated, take the time to listen to all sides, try to focus on the positive — and don't sweat the small stuff."

News and events

News in briefRead more

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International trade trends, challenges, and opportunities for U.S. importers webinar on July 30. Register Today


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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.