Everybody is a dollar bull. Did you turn into a.
Because certainly it had that herd mentality.
My sense is going to be a turnaround for some reason and is it's a pivot for the
longer term. Or is this just a gut check.
Yeah it does seem like it's become a bit more consensus.
The thought process over the last couple of months.
I mean unlike in the you know the first half of the year there is a lot more
debate about the strong dollar and what it ultimately fail.
But we're reaching another point where people argument pick dollar pick dollar
pick dollar and it's about to turn that person.
I think it's too early. You know our view is that it's going to
persist for a while yet. The underlying conditions for that
change in the dollar's direction aren't there but very topical.
But again I think what's also a function of it is because as you said inflation
we're thinking differently perhaps. But also positioning in the dollar is
not very favorable at this point. Is it because of this whole God dollar
doom loop pray that the stronger dollar is gonna lead to slower global growth
and then there's going to be kind of this haven play back into the greenback.
Is that just too strong. Do you think.
Well I mean my my framework is not quite a doom loop.
It's just that how the dollar typically performs when global growth is slowing
it's a very clear pattern even going back into the 70s intensity better.
But then there's other factors that are supporting the dollar.
I mean we can talk about eventually the Fed pivoting but those yields are still
quite tasty and that's another key driver.
And then also the risk environment is still fairly fragile meaning perhaps
it's rallying a little bit today. But you know you can't be very confident
with the global backdrop. That's not great.
I mean whether the yen is easing I was wonder about is this actually a
reflection of the economy rather than speculative plays here because the
economy has not really been motoring along for two decades.
Well I think again it's a combination of factors positioning against the yen as
is quite extreme. But you know Japan went through
essentially a terms of trade shock when we had the big move up in energy prices
and that's coinciding with a maximum policy divergence from major central
banks versus the BMJ. So you know it's easy to back out why
the yen is weaken so much but in many ways it weaken a lot more than what
people were expecting. But the interest rate advantage that you
see the dollar you know dollar yen it's different with dollar.
You're a euro dollar now. Right.
Given that we've seen more hawkish talk from the ECB would you buy into the euro
now. No I I'm still a believer.
Unequivocal answer for a change. I'm I'm very much for the view that this
is a short term squeeze and ultimately will fail again because it comes down to
who can actually deliver on these rate increases now.
The ECB as you said is talking very hawkish.
But will they be able to meet the market's expectations for rate hikes.
And we would push back against that. Where's the Fed.
I think yes the pricing is more right than wrong.
And the chances of actually the euro area going into a deep recession are
much much higher than the US given they're not seeing with energy boom in
Ukraine right now. And so I suppose that limits the
movement to the European having. I think the same thing applies to
Sterling which is always acting like a proxy.
Absolutely. And that's very much central to why
we've been quite cautious on these currencies for for quite a long time.
And also if you dig a little bit deeper look at the underlying flows may be a
little bit boring for some of the viewers.
But if the balance of payments is actually not pretty for either one of
those currencies what about commodities. So I mean you know some would suggest
maybe we're in a super cycle. You know given that situation Ukraine
that energy prices are going to stay elevated for some time.
Does that diminish the value of the dollar in any way.
I don't believe so because in turn if if you if that's your view that you believe
that commodity prices are going to stay higher energy prices relatively high
that just mean it's another bellwether of global growth being in a darker
position. And in turn that probably means that the
dollar is still in a good place. Can't get to those who do enough to kind
of avoid that seven scenario as people are starting to really price in.
Well I think they've been pretty successful so far.
Yeah I think the speculation is just dampened down because people are reading
the tea leaves that they want the exchange rate.
Just be taking a breather now. There's still a lot of cyclical pressure
against the currency. But to go against these these big
deviations in the fixing it's not the right time.
And I think as I said the market is reconsidering right now.
What is the thinking behind this though. Know what are they doing.
Exactly why. Well we've seen it periodically.
You know even earlier this year when he was back in April and going into early
May actually the fixing deviation was getting quite big.
And I think it's just putting a little bit of a handbrake on the market's mood
about not getting overly negative about the currency.
And that's just coming through yet again.
And I think as well you know over the next couple of weeks there's still a lot
of concern about what's happening domestically on the economy.
And it's just a stretch just to try and pull the market in a little bit from
getting to to negative on on the renminbi.
And I guess is it kind of stamp out the speculation that they're using a weaker
currency to boost exports as well as some sort of policy lever.
Yeah you're right. I mean that that drop that topic always
comes up. But I'm not a big believer frankly
because you know how much would your currency actually have to weaken to
really give that kickstart to exports when the global trade cycles.
Very. It wouldn't be a very successful policy.
Yeah tell us a little bit about the currencies which you expect to do better
than others. I mean you've got deficit nations and
you've got surplus nations. You know it doesn't really matter how
your current account is. Absolutely.
And there's been huge changes in that landscape.
You know even in Asia for instance Korea which is normally you know in the past
would have quite a strong current account or trade position that's been
deteriorating for quite some time and it's left the currency more vulnerable.
But I think when I kind of step out and I look at the broader emerging market
complex we're really not spoilt for choice about which currencies to like
versus others. I mean really in Asia coming back here
it's the Singapore dollar props. There's a longer term recovery story for
the Thai baht but there's really not a lot.
We were talking a lot I guess about know ethics reserves which are dwindling.
Yeah there is one bank that said I think some of these economies maybe have maybe
six to nine months before those things start to dwindle.
How concerned should we be. Again I would not necessarily agree with
that because you can look at so-called import cover and I'll give you these
type of oh you only have this number of months left of effects reserves.
But really you need to look at a broader measure.
And if you look at some of the other statistics actually says they got very
adequate amount of reserves like India really comes up and that nature reserve
adequacy is is very solid in that country.
But like the Fed they've got to balance what's going on with every country.
They want to just chase the Fed and find that their economy is in tatters as a
result. And I think that the Indonesian finance
minister is hugely cognisant of this. And I think we can hear has to say we
don't want to use excessive force in this case policy instrument like
interest rate that can kill the whole wonderful
recovery of the economy. But that is really up to the central
bank to do that. And that's why they decide if this
inflation is going to affect the current inflation is going to affect the
expectation of the inflation in a more permanent basis then it is time for the
central bank to act. Is it full.
That's the conundrum facing all these guys.
Well absolutely. So it's about getting that balance
right. But you know it's a very difficult
backdrop. It's not just about the Fed raising
interest rates. As I said it's the slower global growth
environment. But they did know.
Whether it's Indonesia or other policymakers they've got to be very
careful about not pushing the envelope too far because they're going to have
bigger problems down the road. So I fully understand that.
I think put a lot of central bankers are waiting for particularly the emerging
world. Is that the Fed will eventually say
we've done enough and maybe get a little bit of a sigh of relief.
Well that's going to be sometime. Yes.
So what else can central banks do. Do they just have to turn left
supportive. Do they have to continue raising rates.
Well I think for the most part yes. They're going to have to maintain a
fairly tighter monetary policy stance that they would like and you know bring
it back to exchange rates maybe smoothing some of that volatility
deploying some of those efforts reserves.
And hopefully that will buy time and be enough until we see a pivot.
But even then there's no guarantee on that at all.
Great to have you Paul. Michael there.
HSBC is head of Global Ethics Research.