LB's Global Fx Strategies, April 26, 2007

LB's Global Fx Strategies
April 26, 2007

I. Watch M&A trends in the G10

1. M&A is a kind of capital flow proxies. In the 1990s, the US economy was the beneficiary of the M&A boom and foreign direct investment (FDI) followed.

2. M&A activity has some leading indication for FDI.

3. In LB's research, EUR and GBP benefit from M&A activity.

4. LB's M&A pressures indices
(1) Data: LB collects the aggregate of announced deal over $500m in the US, European and Japan by target company and presents as % of global capitalisation.
(2) LB's M&A pressures index = time index * ln(deal size)
where time index = the change * (0.27 * ln(days following announcement of deal))
where the change = ??
(Stephen's thought: It should be a summation concept of M&A data flow.)


II. G10 FX Strategy

1. LB's study shows that a simple pairwise regressions over the period 2005-2007 (daily data) suggest that every 20bp convergence, EUR/USD is able to appreciate by 2.2 cents. The correlation and explanatory power the two-year spread (German / US spread) is able to exert on EUR/USD remain high (0.84 and 0.7). (p.7)



III. Taiwan Focus

1. USD/TWD Spot (QoQ change) v.s. Financial account balance has positive correlation. (see Figure 1 at p.29)

2. An increase in the Lifer's oversea investment gap from 35% to 50% of total assets generate around $35.9 bn capital outflow (February life insurance total assets at $239bn). The potential outflows over next 2 year period could average $1.5bn to $3.0bn per month.

3. LB takes a long INR/TWD position this week, TWD as a funding role.

4. The growth backdrop in Taiwan is weak, while the CBC's monetary policy tightening cycle is close to its end.(??)