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The United States is the world's leading economic power, with GDP valued at over $10 trillion USD in 2001. This is the highest GDP in the world and based upon purchasing power parity (PPP), it is three times the size of Japan's output, five times the size of Germany's and seven times the size of the United Kingdom's GDP. With the U.S. having the most liquid equity and fixed income markets in the world, foreign investors have consistently increased their purchases of U.S. assets. Foreign direct investments represent approximately 40 percent of total global net inflows for U.S. On a net basis, the U.S. absorbs 71 percent of total foreign savings.

The import and export volume of the U.S. also exceeds that of any other country. On a netted basis, the U.S. is running a very large trade deficit of nearly $500bln. This is because the U.S. is the largest trading partner for most countries, representing 20 percent of total world trade. This large absolute number indicates that the U.S. is heavily reliant on capital flows and the dollar is very sensitive to changes in those flows. In fact, in order to prevent a further decline in the USD as a result of trade, the U.S. would need to attract close to $1.9bn in capital inflows per day.

The U.S. is primarily a service-oriented country with nearly 80 percent of their GDP coming from real estate, transportation, finance, healthcare, and business services. With the advent of new technology such as the internet, productivity in the U.S. has consistently increased. This is particularly interesting in light of the recent economic downturn, because many economists argue that despite the current downturn, increased productivity indicates that we are in a "new economy." The importance of this comment is that if the U.S. is indeed in a "new economy," previous reactions to recessionary conditions may not repeat themselves in this downturn.

Characteristics of the U.S. Dollar
More than 90 percent of all currency deals involve the USD.
Gold and USD tend to have inverse relationships.
Market participants closely follow the U.S. Dollar Index as a gage to overall USD strength or weakness.

Economic Indicators for United States
Employment
Consumer Price Index (CPI)
Producers Price Index (PPI)
Gross Domestic Product (GDP)
International Trade
Employment Cost Index (CPI)
Institute of Supply Managers (Formerly NAPM)
Industrial Production
Consumer Confidence
Retail Sales

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UNITED KINGDOM

The United Kingdom is the world's fourth largest economy with GDP valued at over $1.4 trillion USD in 2001. The economy is very healthy, with low unemployment, expanding output and resilient consumption. The strength of consumer consumption has in large part been due to a strong housing market, which is currently 16 percent above the peak in 1988. The U.K. has a service-oriented economy, with manufacturing representing an increasingly smaller portion of GDP, equivalent to only one-fifth of its national output. It's capital market systems are one of the most developed in the world and, as a result finance and banking, has become the strongest contributors to GDP. Although the majority of the U.K.'s GDP is from services, it is important to know that they are also one of the largest producers and exporters of natural gas in the EU. The energy production industry accounts for 10 percent of GDP, one of the highest shares of any industrialized nation. This is particularly important, as increases in energy prices, such as oil, will significantly benefit the large number of U.K. oil exporters.

Overall, the U.K. is a net importer of goods with a consistent trade deficit. Its largest trading partner is the European Union (E.U.), with trade between the two constituencies accounting for more than 50 percent of all of the country's import and export activities. The U.S., on an individual basis, still remains largest trading partner.

The central issue that the U.K. is grappling with is whether or not to join the Euro. The decision on Euro entry has significant ramifications for the U.K. economy. Currently, this is the key political and economic agenda on the government's plate. The U.K. is a very political country where government officials are highly concerned with voter approval. If voters do not support Euro entry, the likelihood of ECU entry would decline. The following are some of the arguments for and against adopting the Euro.

One of the primary reasons for not joining the Euro is that the U.K. government has sound macroeconomic policies that have worked very well for the country. Their successful monetary and fiscal policies have led them to outperform most major economies in the current economic downturn, including the EU.

Characteristics of the British Pound
GBP is very liquid.
GBP has one of the highest interest rates among the developed countries.
Interest rate differentials between Gilts and foreign bonds are closely followed
Euro-sterling futures can give indications for interest rate movements.
Comments on Euro by U.K. politicians affect the Euro.
GBP has positive correlation with energy prices.

Economic Indicators for United Kingdom
Employment Situation
Retail Price Index (RPIX)
Gross Domestic Product (GDP)
Industrial Production
Purchasing Managers Index (PMI)
U.K. Housing Starts
Consumer Price Inflation (CPI)
Producer Price Index (PPI)

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EUROPEAN UNION

The European Union (EU) was developed as an institutional framework for the construction of a united Europe. The EU consists of 15 member countries; Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, and the United Kingdom. All of these countries share the Euro as a common currency, except for Denmark, Sweden and the United Kingdom. They are known as the European Monetary Union (EMU). Aside from a common currency, these countries also share a single monetary policy dictated by the European Central Bank or (ECB).

The EMU is the world's second largest economic power, with GDP valued at over $6 trillion USD in 2002. With a highly developed fixed income, equity and futures market, the EMU has the second most attractive investment market for domestic and international investors. The EMU is primarily a service-oriented economy. Services in 2001 accounted for approximately 70 percent of GDP while manufacturing, mining and utilities only account for 22 percent of GDP.

The EMU is a trade and capital-flow driven economy. Unlike most major economies, the EMU does not have a large trade deficit or surplus. In fact, the EMU went from a small trade deficit in 2001 to a small trade surplus in 2002. EU exports comprise approximately 19 percent of world trade while EU imports account for only 17 percent of total world imports. Because of the size of the EMU's trade with the rest of the world it has significant power in the international trade arena. International clout is one of the primary goals when the EU was formed allowing the individual countries to group as one entity as well as negotiating a more equal playing field with the U.S., its largest trading partner.

The EU's growing role in international trade has important implications for the role of the Euro as a reserve currency. At the end of the 1990s approximately 65 percent of all world reserves were held in U.S. dollars, but with the introduction of the Euro, foreign reserve assets are shifting in favor of the Euro. This trend is expected to continue while the EU becomes one of the major trading partners for most countries around the world.

Characteristics of the Euro
EUR/USD is the most liquid currency.
Euro risks as a new currency.
Spread between 10Yr U.S. Treasuries and 10YR Bunds can indicate Euro sentiment.
Interest rate differentials are used to predict Euro area money flows.

Economic Indicators for the European Union
Gross Domestic Product (GDP)
Individual Country Budget Deficits
IFO Business Climate Survey
Harmonized Index of Consumer Prices (HCIP)
M3 (measure of monetary supply tracked by the New York Federal Reserve Bank and reported every Thursday)
German Unemployment
German Industrial Production
Consumer Price Inflation (CPI)
Producer Price Index (PPI)

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AUSTRALIA

Australia's gross domestic product (GDP) for 2002 was close to $400 billion USD The economy is relatively small, but on a per capita basis is comparable to many industrialized Western European countries. Australia has a service-oriented economy with close to 79 percent of its GDP coming from industries such as finance, property and business services. However, the country has a trade deficit, with manufacturing dominating its exporting activities. Rural and mineral exports account for over 60 percent of all manufacturing exports. As a result, the economy is highly sensitive to changes in commodity prices.

Japan and the ASEAN (Association of Southeast Asian Nations) are the leading importers of Australian goods. In the past, however, Australia has experienced much of the spillover effects of general Asian weakness. This resilience stems from Australia's sound foundation of strong domestic consumer consumption.

Characteristics of the Australian dollar
Commodity-linked currency.
Australia has one of highest interest rates among the developed countries.
Interest rate differentials between the cash rates of Australia and the short-term Interest rate yields of other industrialized countries are closely followed.
Severe weather conditions such as droughts negatively affect Australia's economy.

Economic Indicators for Australia
Gross Domestic Product (GDP)
Consumer Price Inflation (CPI)
Balance of Goods and Services
Private Consumption
Consumer Price Inflation (CPI)
Producer Price Index (PPI)

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NEW ZEALAND

New Zealand is a very small economy with GDP valued at approximately $50 billion USD in 2001. The country's population is actually equivalent to less than half of the population of New York City. It was once one of the most regulated countries within the OECD (Organization for Economic Co-operation and Development), but over the past two decades has been moving towards an open, modern and stable economy.

New Zealand also has highly developed manufacturing and services sectors, with the agricultural industry driving the bulk of the country's exports. The economy is strongly trade-oriented, with exports of goods and services representing approximately one third of GDP. Due to the small size of the economy and its significant trade activities, New Zealand is highly sensitive to global performance, especially as it relates to its key Asian trading partners, Australia and Japan. Together, Australia and Japan represent 30 percent of New Zealand's trading activity. During the Asian Crisis, New Zealand's GDP contracted by 1.3 percent as a result of reduced demand for exports, and two consecutive droughts from reduced agricultural and related production.

Characteristics of the New Zealand dollar
Strong correlation with AUD.
Commodity-linked currency.
Carry trades.
With the highest interest rate of the industrialized countries, the NZD has been one of the most popular currencies to buy for carry trades.
Population Migration.

Economic Indicators for New Zealand
Gross Domestic Product (GDP)
Consumer Price Index (CPI)
Producer Price Index (PPI)
Balance of Goods and Services
Private Consumption

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JAPAN

Japan is the third largest economy in the world with GDP valued at over $4 trillion USD in 2002 (behind the U.S. and the entire Eurozone). The country is also one of the world's largest exporters and is responsible for over $400 billion in exports per year. Manufacturing and exports account for nearly 20 percent of GDP. This has resulted in a consistent trade surplus, which creates an inherent demand for the JPY (despite severe structural deficiencies). Aside from being an exporter, Japan is also a large importer of raw materials for the production of its goods. The primary trade partners for Japan in terms of imports and exports are the U.S. and China. China is becoming an increasingly important trade partner. In fact, China's inexpensive goods have allowed it to gain a larger share of Japan's import market.

Japanese Banking Crisis
In the 1980s, Japan's capital market was one of the most attractive markets for international investors seeking Asian investment opportunities. The country had the most developed capital markets in the region while its banking system was considered to be the one of strongest in the world. At the same time, the country also experienced above-trend economic growth and near-zero inflation. This resulted in rapid growth expectations, boosted asset prices and rapid credit expansion that led to the development of an "asset bubble." Between 1990 and 97 the asset bubble collapsed inducing a USD $10 trillion fall in asset prices, as well as a fall in real estate prices that accounted for nearly 65 percent of the total decline. This fall in asset prices sparked the banking crisis in Japan, which began in the early 1990s and developed into a full-blown systemic crisis in 1997, followed by the failure of a number of high-profile financial institutions.

With Japan experiencing deflationary conditions each succeeding month of deflation raised the real burden of the banks' outstanding debt. To date, the Japanese Ministry of Finance and Bank of Japan are still grappling with this problem.

Characteristics of the Japanese Yen
Proxy for Asian Strength / Weakness.
The Bank of Japan and Ministry of Finance are very active participants in the FX markets.
JPY movements are sensitive to time: Fiscal year end, Japanese trading hours etc.
Banking stocks are widely watched.
Carry trade effects.

Economic Indicators for Japan
Gross Domestic Product
Tankan Survey
Balance of Payments
Employment
Industrial Production

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SWITZERLAND

Switzerland is the 19th largest economy in the world, with GDP valued at more than $240 billion USD in 2001. The economy is relatively small, but it is one of the wealthiest in the world on a GDP per capita basis. The confidentiality offered by the Swiss banking system coupled with the country's lengthy history of political neutrality has created a "safe haven" reputation for the country and its currency. As a result, Switzerland is the world's largest destination for offshore capital. The country holds over U.S. $2 trillion in offshore assets and is estimated to attract more than 35 percent of the world's private, wealth-management business. This has created a large and highly advanced banking and insurance industry that employs at least 50 percent of the population and comprises more than 70 percent of the total GDP. Since Switzerland's financial industry thrives on its safe haven status and renowned confidentiality, capital flows tend to drive the economy during times of global risk aversion while trade flows drive the economy during a risk-seeking environment. Therefore, trade flows are important with nearly two thirds of all trade conducted with Europe.

Characteristics of the Swiss Franc
Safe Haven Status.
Swiss Franc is correlated with gold.
Carry trades effects.
Interest rate differentials between Euro and Swiss futures and foreign interest rate futures are closely followed.
Potential changes in banking regulations negatively weigh on CHF.
Mergers and acquisitions are common in Switzerland's banking and insurance sectors.

Economic Indicators for Switzerland
Consumer Price Inflation (CPI)
Producer Price Index (PPI)
Gross Domestic Product (GDP)
Balance of Payments
M3 (measure of monetary supply tracked by the New York Federal Reserve Bank and reported every Thursday)
Unemployment
Production Index (Industrial Production)

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CANADA

Canada is the 7th largest country in the world with GDP valued at $700 billion USD in 2001. The country has been growing consistently since 1991. Canada is currently the world's 5th largest producer of gold and the 14th largest producer of oil. However, two-thirds of the country's GDP comes from the service sector, which employs 3 out 4 Canadians.

Manufacturing and resources are very important for the Canadian economy, as it represents over 25 percent of the country's exports.

Characteristics of the Canadian dollar
Commodity linked currency.
The U.S. imports 85 percent of Canada's exports. The Canadian economy is highly sensitive to changes in the U.S. economy.
Mergers and acquisitions between firms in the U.S. and Canada are very common.
Interest rate differentials between the cash rates of Canada and the short-term interest rate yields of other industrialized countries are closely followed.
When Canada has a higher interest rate than the U.S, the sell-USD, buy-CAD carry trade becomes more popular.

Economic Indicators for Canada
Unemployment
Consumer Price Inflation (CPI)
Producer Price Index (PPI)
Gross Domestic Product (GDP)
Balance of Trade
Producer Price Index (PPI)
Consumer Consumption

 

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