He's talking about the ECB here Max and welcome to the program.
I mean it does seem as though you put up rates.
But on the other hand you're lending out a whole lot of support to people who are
facing huge electricity and energy bills looking into the winter.
It seems like that in itself is going to act like an interest rate hike.
So how do you factor all that in. Knell for the dollar I still think the
energy crisis does kind of weigh in favor of a weaker euro versus the
dollar. And I think that a lot of the reason
that we saw euro dollar rise back above parity this week was not only the ECB
hawkishness but also the fact that the European Union basically stored 80
percent of its gas energy needs for the winter.
So that's a good short term relief. But I don't think this kind of
geopolitical tension with the Nord Stream pipeline is going to end anytime
soon. So this kind of uncertainty over
Europeans energy security over time is still going to weigh on the euro from a
trade balance perspective and also weigh on the ECB in terms in terms of what it
can do. So ISE Kathleen to point out the ECB
choices are tougher and that gives more room for the Fed to be more hawkish and
the ECB which still is point still points.
So a weaker euro against the dollar. There seems to be this this term now
that's been circling a growth recession in the U.S.
Do you think Japan basically has shifted towards that now and instead of a soft
landing scenario. And what does that mean for dollar.
Yeah I mean I think the term growth session is kind of the new play on the
old theme of stagflation right. And I think the 70s and 80s template
that power and some of the central bankers have been mentioning is a good
one that you really can't cut rates anytime soon.
So even though you could see a technical recession in the US we know that the
last Q2 GDP print was slightly negative. I feel like for most Americans it's not
really going to feel like a recession when prices are still high inflation is
high and when the labor market is still quite strong.
So I feel like that still gives the Fed a lot of room to continue being hawkish.
And I think that over it's taken some time but the market slowly coming around
to the fact that what Powell and what Mr is saying is probably true that there's
no real reason to cut rates in 2023. When you have a tight labor market and
when you have inflation still running at 70 percent
Max you know things are quite funny right now in a sense that it's fairly
clear what the Fed wants to do. And everyone tells us it's the strong
dollar story and nothing else. Is it easy doing what you do right now.
Whereas whereas the new ones whereas the where's the expertise coming in.
What are the assumptions that you're making right now moving forward.
Yeah I mean I would say it's easy in that the narrative has been around for
some time that you know we're going to see a stronger dollar on Fed hawkishness
relative to other central banks. But I we're I'd say it's difficult is
that the market is always kind of looking for this pivot.
And it's it's a kind of our job to kind of stick to the long term the
fundamental view where we are kind of saying you know even though you think
that you know weaker S&P and how it's hitting us ISE somehow it's hitting us
PMI. Maybe that'll cause the Fed to back off.
If we look at what the market is saying vs.
what the Fed is saying we're clearly going to side with the Fed.
So I think the difficulty in my job is trying to convince my colleagues that
sometimes the market is wrong when we want to.
So you sit as low inflation environment. I think that's where it's tricky but
from a fundamental story it's quite easy.
A dollar yen. I mean I wonder you know is the dollar
going to move. Yes.
Purely on interest rate differentials Max or do I look at the risk sentiment
and maybe these recession risks that are building which could actually move
dollar yen a bit lower. What's your take on you know.
I feel like for Dorian it's not just interest rate differential story it's
also a trade deficit story. What's going on.
Japan in high energy prices are still kind of making these very negative
trade deficits in China particularly in yen terms which is kind of eroding the
current account. So I do think that there's always a knee
jerk reaction to Dorian going lower on risk.
But that was back when you know the US industry was at zero.
Now that the U.S. interest rate is at two and a half
percent the Fed funds rate and it looks like you know three two or three point
two five by September FOMC those kind of risk off moves and and become much less
powerful than what we were used to say in 2013 2014.
So I think the market is obviously a little bit wary about the Ministry of
Finance coming to intervene around 140. But I for one think that Japan will
stick to its 20 commitments in ravine. And once the Kerry floats push a dollar
above 140 and realize that the Ministry of Finance is not there then I think the
audience should shoot much higher towards 140 to be discussing China
discussing the R and B and where it's headed the moment with another stronger
than anticipated fixing for the yuan believe that this is actually the
seventh straight day that they've done this.
It doesn't seem to move the dial much has it Max.
What's the what's your take on all this. Yeah well I will say that today's fix
actually surprised me because the model was only passively pointing to a move
that was maybe around twenty one tips higher than previous and they still
basically adjusted it stronger is the calculation.
So for me that's a signal that they're basically going to stabilize the fix at
six point nine. But I think we as we've seen recently
and in recent days and seen it still at you know six ninety one 692 that the
spot rate can actually detach something to fix quite strongly.
So I think as long as the U.S. data is strong as long as this kind of
negative sentiment equity markets you could see some limited upside for
dollars seen each. So are actually still like shorting the
yuan against the dollar. Not in the short term but I think it's a
good position to hold. It's carry positive.
And the next time the PBS surprises the market and cut rates either in
mid-September mid October or November then you'll be already holding that
position and it'll move quite quickly. Max I mean China included where do you
think the markets both underpricing and over pricing.
A well respected tightening or loosening cycle.
I think that most markets are probably not really pricing in enough timing
because I think if you look at most of the central bank surprises that we've
seen in Asia it's mostly been to the upside right to make a Korea.
Last week hiked rates 25 basis points as expected.
But when they kind of revised their inflation forecasts higher by 80 basis
points for 2023 the market sort of pricing in the terminal raping higher
adds are rightly shit because even though they're kind of downgraded GDP
forecasts and they're still raising CPI and they're is still signaling that
inflation is stickier than they expected similar in Indonesia you know they
didn't really or the market didn't really expect any moves.
Last week after the governor March Yeo said you know we're not in a rush but
obviously the inflation direction is still higher in Indonesia and in India
and South Korea everywhere. So they're going to start moving sooner.
And I think that the recent currency volatility that we saw in Dollar IDR in
Dollar Korea probably add some a little a little bit of impetus to be more
hawkish as well. Biggest conviction trademarks for you
know you look at the Thai baht a little bit more.
That's also part of the China story to. Yes I do like longer type ISE by one of
my favorite trades right now. I actually opened up this trade three
weeks ago and it's actually already at thirty six point six target.
But I do think that there is further upside after recent comments yesterday
by the banker Tom Keene which did say you know we're focused on our own
domestic story. The Thai baht exchange rate is based on
a stronger dollar. It doesn't sound like they are too
concerned with board weakness. And we just look at the fundamentals of
Thailand. Yes tourism is rebounding in Thailand.
But as long as China remains Covid zero policy through 2023 at least through the
first quarter of next year that means that 27 percent of Thailand's usual
tourist pool is gone. So they have a lot of excess capacity
within their tourism space based on the pre Covid levels.
And one way to encourage that is through port weakness.
So the big time I think we'll keep policy loose and that will basically
push the board weaker against the dollar.