'Fed rate hike to come in March at the earliest, dollar bulls ditched' - Simon Smith, FxPro

SIMON SMITH
PROFILE:
• Current Job: Chief Economist for FxPro
• Career: Holds an MSc. in Economics from the University of London and a BSc. from Brunel University. He has held economic and strategy positions with Standard & Poor’s.

View profile at FXStreet

Simon Smith has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining FxPro in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital. 

Simon has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International. He holds an MSc. in Economics from the University of London and a BSc. from Brunel University.

As you know it was never on my agenda, even at the start of the year, so whilst was sweating mid-year, I retain the view that they are not likely to raise this year and would see March as being the earliest that we are likely to see them move. If anything the risks are that it comes later than that. If we look on a cyclical basis, things are not working for the US beyond the shores of the US. Emerging markets are struggling, many asset markets are also looking rich. Of course the Fed is desperate to start the path of normalisation, but I don’t feel we are in a more normal world that will allow that.

A lot of bullish dollar views have been ditched over the past week as the Fed tightening story to the stronger dollar has moved off the agenda. I think the rate differential narrative on EURUSD has become very dated, but also incorrect for much of the year. If anything, I see EURUSD moving higher into year-end but moved above 1.15 will be difficult to sustain as the ECB will be uncomfortable with such levels being sustained. I suspect Draghi will be dovish if EURUSD continues to move higher when the ECB next meets 22nd October, keeping open the possibility of more policy measures towards year end.

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It’s getting a lot more crucial to ask against what. We’re not going to enter a cyclical and global dollar rally of the type we saw last year. It’s more likely that we are going to further dollar gains vs. EM, but even that is starting to look stretched given the extent of dollar vs. EM gains seen last week. I don’t see dollar as a buy on dips vs. EUR until around year end, there is better scope vs. the yen into year end.

It’s going to be about the vote and the minutes. I am still surprised that we are seeing one member voting for higher rates given the deteriorating global backdrop but also some of the domestic indicators have been heading south, such as the latest services PMI reading.

It’s clear that there is a growing resilience to the Aussie. The past two and a half years have seen the Aussie lose one-third of its value against the US dollar, a time during which it has been the weakest currency on the majors. I think the dynamics that have pushed the Aussie lower (falling interest rates, China slowdown and re-balancing) are diminishing. At most the RBA will ease once more, but that it the most we can expect. Yes China remains on the weak side, but again the worse is behind us on the that front. There is still a yield pick-up to be had which will remain supportive. The recent price action also been indicative of the fact that the market does not have the appetite to push for a sustained push below the 0.70 level.

I was a structural bear on gold for a long time. The outlook from here is looking better, especially given the dollar backdrop. The main thing to watch is inflation rates rising and interest rates globally remain low, pushing real long-term interest rates back into negative territory. If that happens, then we can expect to see gold moving back to the 1400 level.