'Fed to hike rates: they made a big mistake in September and will not repeat it' - Barbara Rockefeller

BARBARA ROCKEFELLER
PROFILE
• Current Job: President at Rockefeller Treasury Services, Inc.
• Career: Holds a degree in economics from Reed College and a Masters in international affairs from Columbia University. Senior risk manager in the international division at Citibank before starting in 1990 the newsletter business.

View profile at FXStreet

Barbara Rockefeller is a foreign exchange veteran and technical analysis pioneer. She is an international economist and trader specializing in foreign exchange. She is the publisher of three daily newsletters and author of six books, including Technical Analysis for Dummies and co-author with Vicki Schmelzer of The Foreign Exchange Matrix. 

Miss Rockefeller’s newsletters are read by hedge fund managers, big bank trading desks, multinational corporation treasurers, central banks, and individuals. The morning "Daily Currency Briefing" is a synopsis of events and forecasts in spot foreign exchange.

What do you expect out of the central bank meetings in December?

Both the Fed and the ECB will do exactly as they said they would. The Fed will hike rates for the first time since 2006 and the ECB will enlarge and prolong QE, as well as cutting the deposit rate from -0.20% to -0.30% in order to widen the securities it is allowed to buy.

Do you think chinese data will have an impact on the Fed decision?

No. When the Fed named “global market disturbances” as one of the reasons for delaying the first rate hike in September, the markets were appalled. The statement also contradicted the statements made by Vice Chairman Stanley Fischer in May, in which he said yes, as the issuer of the world’ primary reserve currency, the US does have a special responsibility to the rest of the world. But the optimum way to fulfill that responsibility is to keep the US economy on a steady growth track. Therefore, monetary policy should be directed at domestic conditions. The Fed made a big mistake in September and will not repeat it.

Will the year end with high volatility in the FX markets? What effect do you think profit-taking strategies may have?

Volatility spikes occur in response to surprise Events. Some analysts worry that the fall in the euro is already giving an export growth boost to the eurozone economy as well as a shot of imported inflation. The ECB could pull back on Draghi’s strong suggestion that QE will be expanded and extended in time, setting off a euro rally and thus profit-taking on short euro positions. Other scenarios are sure to emerge, such as the US bond market taking the stance that the Fed will be “one and done,” i.e., no further hikes during 2016. This would pull the 10-year yield back down and weaken the widening differential that is the true underpinning of the dollar rally.

We seldom get a year-end effect because while the banks and brokers try to clear their books, some big players don’t always make it easy for them. Many multinationals and fund managers close their foreign books at end-November. Hedge funds and some big managers can turn on a dime if there is an Event and don’t care about the date per se. Once in a blue moon we get an important name publishing a new forecast and it grabs the imagination. Goldman Sachs did that near year-end 2004, resulting in a euro rout in January 2005. Bottom line, forecasting volatility is not really a good use of time unless your crystal ball discloses what the Event will be.

Where do you think EURUSD will be nearer at the end of the year: 1.10 or parity?

The euro/dollar “should” be closer to parity than to 1.1000, on the grounds that not everyone has accepted the divergent monetary policy thesis yet. The market has a historical bias against the dollar, a lot of it warranted, and turning that around is like turning the proverbial ocean liner. We will probably see surges as diehard dollar perma-bears throw in the towel. And as we all know, currencies tend to overshoot. It would not be surprising to see 0.8500 as we had in 2001-2002, especially if there is failure to meet EMU standards in places like Greece and Portugal and we get a renewed existential crisis.

Even with its latest dovishness, do you think the BoE will wait long to hike rates after the Fed does it?

We subscribe to the theory that the Fed and BoE confer on the telephone quite often as well as holding public meetings at various conferences, probably more than the Fed and, say, the Bank of Japan. We have no proof of collaboration but it seems like an obvious deduction. Analysts cut down a lot of trees to opine on who will be first. Once it looked like the Fed would be first, they spent time on how fast the BoE would follow. Gov Carney said the picture would be clearer by year-end and we have no reason to think he is blowing smoke. Assuming the Fed acts in December, the BoE should be close behind, in the first quarter. Talk of the second quarter for the first BoE hike fails to take into account that the Fed and BoE are bolstering each other as the only two major central banks to emerge from recession to normalization. The concept of normalization has more power than most analysts are giving it. What it really means is the end of the emergency and thus emergency measures like ZIRP are no longer appropriate.

Are the stock markets well prepared for a Fed rate hike?

If equity traders are not prepared, they must have been asleep at the switch since May 2013 when Fed chairman Bernanke first talked about tapering. By now the analysts should have been able to factor into balance sheets and income statements the effect on earnings of higher interest expense and a higher dollar. We have known for over two years these effects would be coming. If analysts don’t have a clear picture, they are not very good analysts. Unfortunately, this tends to be true, but to be fair, equity prices do not follow earnings and earnings forecasts one-for-one, either.

Nobody ever knows which way the stock market will jump next. Logically, if the economy is robust enough for the Fed to hike rates, even the tiny amount now contemplated that affects hardly anything, the stock market should see forecasts of rising revenues and earnings. But if they are in a bad mood, they will disregard the robustness theory. We have already seen some silly stuff about the normal “cycle” of a bull market nearing its end around seven years out. Nearly everything said about cycles is completely wrong or can be easily refuted, but sometimes these ideas get a grip. Bottom line, the stock market “should” be fully prepared and the hike should have no effect when it does occur, having been priced in, but don’t count on it. Some other idea-of-the-day may appeal to their flibbertigibbet minds.