'Chinese stocks have no correlation with overseas markets, but volatility unnerving investors elsewhere' - 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.

Do you think the latest EURUSD rally will be limited and offer good opportunities to the bears?

It’s all too easy to construct a bearish case for the euro, short it and then get steam-rollered. The case for it being the favoured short vs. the dollar in a dollar bullish environment is largely over. QE is starting to have an effect, we’re seeing bank and other lending recover and with it yields, which are a key driver of currencies. The Eurozone is also running a healthy current account surplus and we are again in a period during which investors are becoming more discerning between those currencies that need to rely on overseas capital (e.g. many emerging markets, sterling, Canada, Australia). As such, I think we are heading for one of those period where the single currency is likely to surprise to the upside over the summer period.

What do you expect from the Fed statement?

Yellen moved away from the specific forward guidance back in January, when the infamous “considerable period” language was removed. As such, the Fed has moved away from structured forward guidance and I don’t see them strongly steering markets towards a September move. Firstly, they have been caught out before trying to steer markets into a scenario which subsequently did not pan out. Secondly, given the volatility and instability we’ve seen over the past month, I don’t think the FOMC is yet convinced that a September move is a done deal. So at best I’d expect a modest upward revision of their assessment of the economy, but the specific policy guidance towards the end (“When the committee decides to remove…”) is likely to remain unchanged.

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There are rumors that say China GDP would be closer to 3% that the Government data of 7%. What do you think about that? Would if affect FOMC decision to hike rates?

I think the last release of GDP saw the stats authority defend the accuracy of the data, which was a pertinent departure from the norm and an acknowledgement of the increased scrutiny that they have come under. There are others that have constructed other measures of the economy, based on other factors such as electricity consumption and taking other countries measures of what they have exported to China, rather than China’s numbers for what they have exported elsewhere. So in all honestly, I don’t know whether it’s nearer 7% than 3%. But I always think of the incentives and motivations around a situation. The government have had a growth target for many years, which has seen modest downward revision. There will be a tendency if the going gets tough to choose methods, means and other measures to ensure that the number that comes out is more towards this, because of the political and social costs of it being under-shot. In the broader picture, there are many different ways of measuring growth, which is why internationally recognized standards have been adopted to help with international comparisons. If China moved towards adopting some of these, then investors would likely have more faith in the numbers.

What's going on in the Chinese stock market?

How long have you got? There are many dimensions to this. It’s not a stock market like any others. Participation is largely retail, vs. institutional in most developed markets. Companies listed on there are to varying degrees state controlled, or dependent on the state in other ways. The government is involved in the market through the provision and manipulation of leverage. All these and other factors mean that the market bears no relation to what is going on in the underlying economy. Indeed, whilst the economy has been slowing the market has been surging, so it does not take a genius to work out what’s going on there (especially when combining with the above question). For the most part, the market has no correlation with overseas markets, but we’ve departed from that recently as the volatility has unnerved investors elsewhere.

USD/JPY was unable to break 125.00 for higher highs and instead, the pair is trading south around 123.00; do you see the Dollar to Yen exchange going as low as 120.00?

Most likely not. I think the dollar is likely to retain a slightly better tone over the summer period, but I don’t see the yen fighting against this. I was talking above about those currencies running current account surpluses and Japan has changed dramatically on this front, from seeing a surplus of 5% of GDP before the financial crisis to near zero last year. Although we’ve seen some recovery from that, the underlying dynamics are negative and I don’t see the yen running ahead from here, so I’m more include to see a drift to 125.00 over the summer period rather than a break lower to 120.

Which is your bottom level for the oil prices? Do you think they will bounce back around the 45$ mark as they did at the beginning of the year?

I think we’re likely to continue lower. We’ve more supply coming on-stream and global growth is not sufficient to take up the slack. As such, I could easily see us re-testing the lower seen earlier this year around the 45$ area. This is one factor that is likely to restrain the Fed from hiking at the September meeting.

After falling below the $1,100 level for the first time in 5 years, some experts are calling for a Gold at $800; What do you think? Do you see further declines or a rebound in XAUUSD?

Were these the same experts calling for gold at $2,000 a few years ago. I’ve been structurally bearish on gold for several years (see recent post with reference to prior one) and continue to believe it will move lower, but more towards the $1,000 level than down to $800. But I make the point that more nonsense is written about gold that any other commodity or asset, largely because it’s a non-yielding asset so one can’t discount the income stream, which leaves the door open to various crazy theories about how to value it. For me it’s simple. Stronger dollar, rising real interest rates globally equals weaker gold price.