'Fed will hike interest rates in the early part of next year' - 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.

It seems the Fed will not hike rates anytime soon; so the EUR/USD is going away of its parity level. Do you think the EUR/USD's rebound is for sure?

We’ve seen quite a chunky correction over the past two days, which has come about on a number of factors, including the ECB’s intended front-loading of QE purchases during ahead of the summer period. I think in the broader picture the up-move on EURUSD can run further, so long as we hold above the 1.1030 level this week.

Do you think a Grexit is possible in the next months?

Last month I said that timing a Grexit was a mug’s game and that it was just a matter of timing. I think it’s got easier because I think this year is looking more likely than not. The amount of time and effort being expended with such little progress means that we are going to see an ultimatum sooner rather than later from official lenders. Greece will then face the choice; either accept or default and leave the single currency. Like I said last month, nothing lasts forever in terms of monetary and exchange rate regimes. Greece has been in for 14 years and it’s been far from plane sailing, for nearly half of that. So yes, it’s more likely than not.

When will the Fed hike rates?

Well, I’ll stick with the early part of next year, which is the view I held early into the year. Naturally, they would like to get started with the tightening cycle. It would signal that the recovery is on track and that we’re at least starting on the path towards a more normal policy setting. That said, I don’t feel that they are confident enough yet in the strength of the recovery to take that first step. As mentioned, they don’t want to move and then be proven wrong by subsequent events, as we’ve seen before with other central banks in recent times and the Fed back in the 30s.

After recent weak economic data, what do you think about the so-called United States' recovery?

For the past 3 years, the recovery in the US has been stronger than the Eurozone and for the most part the UK as well. Output is nearly 9% above the pre-cycle peak. Compare that to just over 4% for the UK and Germany and the Eurozone as a whole still has to achieve this level. The question is to what extent the weakness seen in Q1 was transitory or something more permanent. I think growth will be more modest this year, but I think the outlook for rates is more to be found in the inflation and wages data, rather than the make-up of the recovery.

Cable has experienced a strong reversal in the last month and reached year highs last week over 1.58. Do you think it will continue its uptrend to 1.60 or the dovish BoE QIR will calm the sterling bulls for now?

I don’t think the recovery will extend that far. We’ve seen a decent correction today on the back of the inflation numbers. I think a fair deal, if not all, the fall in the core rate will reverse in the coming 1-2 months, as it was more owing to the transitory impact of volatile travel prices. I’m more confident that the BoE will hike rates later than the Fed and for this reason further upside in cable will prove to be limited.

Do you think USD/JPY will continue trading sideways as monetary policy divergence are away to offer clues on what central banks will do? What is the USD/JPY fair price right now?

The yen (USDJPY in particular) has been unique in recent years for its ability to trade a very tight range, pretty much immune to anything, and then breakout into a strong trended market. The past few weeks it has been notable just how range-bound USDJPY has been, given the volatility we have seen elsewhere. There has been a lot more impetus and fun to be had elsewhere. I think that’s likely to continue in the coming weeks, but if anything the impetus is going to be higher, especially if we see Japanese investors putting more money overseas, as we’ve seen some signs of more recently.