Just given just how we've seen such a face here and even in Asia that are
starting to really catch up with the Fed can we start to maybe get it right when
it comes to pricing in the peak dollar kind of scenario.
Unfortunately I think that's going to continue to be a moving target.
I think markets have generally sort of come to the idea that ah the assumption
that they can forecast the terminal rate for the Fed.
I don't think the Fed even knows what the terms but the trauma rate is.
And it's very possible three months from now we'll be talking about a higher term
more rate. So ultimately seeing the dollar sort of
slow down I think is still a bit of a. In the dream category for now.
But you know ultimately for a weaker dollar to manifest itself you need a
strong euro. And fundamentally it remains
pretty much impaired for the next several months given there is an
impending energy crisis there and an imploding current account
inflation which is rampant margin as well as if that's the euro and that's
below parity now. But the biggest victim of the dollar
strength amongst the majors is going to be the yen.
But is it the major victim. Because it's actually pricing in
economic fundamentals for a country which has an economy which has many
more. But
yeah look when it comes to the yen and specifically dollar yen what's really
been explaining a lot of the variation over the last six months or so.
And it continues to be the case. It been the interest rate spread
and ultimately that spread is almost primarily driven by the U.S.
led of it. So ultimately in order to call a top and
dollar yen you need to call where the terminal rate is for the Fed.
Until we get to that point it's gonna be very difficult to see dollar yen
significantly or materially turn lower from here.
But on a cross basis you could see the yen accurate a little bit more as a
growth hedge against the Aussies against cars against
even the euro as well. So
I think ultimately against the dollar. I think you'd generally want to stay
clear. And as you look at a lot of Asian
currencies as well where they built up several or significant amount of assets
reserves. They're really leaning into that at the
moment to prevent what could have otherwise been a much steeper decline in
their currencies. So Martin David here that takes us
straight to your earlier point that on the euro because what happens to the
dollar I guess is largely driven by that big part of the basket.
Do you think we've seen the lows of the cycle on you because you've exited that
that short position and the short trade but then you also see it seeing a little
bit more downside to about 80 cents. Just take us sort of thinking.
Yes. So on a tactical basis you know taking
profit around parity was was sort of the initial target.
And I think there's been a lot of downside or concerns being priced in to
markets at the Jackson Hole. And what Powell could say
our marriage stance here is that rally should be faded.
And so we will look for another opportunity to sell a euro dollar.
From a fundamental point of view the current account the balance of payments
has generally been a strong point for the euro and the past several years not
the case this year. There's going to be a greater likelihood
probably that you see the current account deficit become much more
sustained over the next couple of quarters in part related to the high
cost of energy imports and also much slower growth
much steeper or a greater slowdown in growth globally.
So export sales are not going to be able to offset the import costs.
And so ultimately from a fundamental basis that creates a drag on the
currency. What was once revered as a positive
anchor for the euro is now going to be a drag.
I'm not sure you could talk about the yuan but looking at where it is and how
it's weak into these near two year lows against a greenback.
And then we have on the other hand a record trade surpluses as we discussed
earlier. That don't really fit together.
So what is being priced into the yuan. Yeah.
So we think ultimately it will continue to weaken
but the path to get there is not going to be linear.
And so we I think we've seen in the last couple of trading sessions where fixings
have been a little bit more on the stronger side of things
that's a bit of an indication that they do want to hold some of the.
The weakness of rest some of the weakness that we're seeing in the
currency. But again fundamentally we're entering
an era which is going to be extremely driven by a heightened focus on the
current accounts. And so.
What was a lot of portfolio inflows into Chinese markets.
We're seeing basically an exodus of that.
I think given the geopolitical situation currently and the slowdown globally I
think it's unlikely to see those portfolio flows reverse to be supportive
of the currency. It's all ultimately dollars.
China continues to be a dollar.
Trying to hire continues to be I think a bias for us over the next several
months. I was also just going to go ahead a
Jackson hole. How do you position.
Because if you take the yield curve for treasuries at least that your Covid
version for twos and tens. We reached nearly about half a point of
50 basis points. Have we seen the worst of this inversion
Lausanne or do you think there's actually some scope to deepen further.
I don't think where we've seen the worst.
I think what we need to be looking at is a significant risk if not the base case
of the 1980s curve inversion where you see anywhere between 80 and 80 to 100
basis points at least of of inversion. And there's really two ways to get
there. I think ultimately if you have a higher
terminal rate or if if the market and the Fed think that terminal is around
three seventy five for the other way to get there is that you keep Fed policy
elevated well into a slowdown. And so that's it is now really looking
at the Fed funds curve basically pricing in some some case for easing later next
year. I think maybe going into the Jackson
Hole symposium the risk here is whether or not Powell pushes back on the on what
markets have priced in which is basically immediate cuts after it
reaches terminal. I my I think markets have done quite a
bit of work in trying to price in a bit of a hawkish Powell but I suspect that
Powell will looking at financial conditions
not yet not tighter. It's certainly not something that I
think the Fed is looking at or welcoming with open arms with open arms at the
moment. I think the risk here is that they
really lean to the market's pricing in cuts right after they reach terminal
next year. Right.
And it's guesswork as you pointed out earlier.
So your estimate of the terminal rate at about 350 375.
This is based on what then. Yeah.
So that's based off of having a moderation in inflation coming down
into next year. You know it's inflate.
We're seeing this across central banks and we're seeing as an analyst community
here which is basically that you have inflation moderating in the next several
months to 2023. But at the same time as each month
passes by you see a a positive revision to inflation projections.
Look at the Bank of England for instance projecting basically double digit
inflation by Q1 of next year. So you have the inflation side of
things. And at the same time I think there is a
structural shift taking place which is really occurring in the supply chains.
And you're seeing in change in attitudes by a lot of the places whether Germany
whether it be Japan on the kinds of energy that they're there they're
willing to now accept for their economies.
You know that that kind of pivot is not going to come cheaply.
So I think we may be dealing in an era that has structurally high inflation for
for quite some time especially as supply chain shifts whether it be on energy or
more on Shery Ahn taking place. That creates a higher terminal turmoil
right in the next several several months.