'GBPUSD could move down to 1.35 by end of April on Brexit referendum risks' - 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.

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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.

No. It’s not about the labour market and near-term rate hike expectations have been priced out of the curve so it would take a number way-off expectations to have a notable impact on the dollar this month. It’s also worth noting that the dollar’s correlation with interest rate expectations (2 year bond yield) has been falling over recent weeks and it currently at the lowest level since the middle of 2014. This is because whilst rate hike expectations been scaled back, the dollar has received some safe haven demand on the back of events global financial markets and China in particular.

The interesting thing about the dollar in January was how the weakness was pretty independent of other factors going on, which suggest that overseas investors were either lightening on sterling asset or (more likely) increasing hedge ratios ahead of the Brexit vote, which looks more and more likely to come later this year. The UK’s current account deficit means that it has been building up liabilities with overseas investors over recent years, so it’s their actions that are going to be most influential on the currency. It’s not that are taking a particular position on the outcome, more reaction to the uncertainty that the referendum creates. I could easily see GBPUSD down to the 1.35 level by the end of April, especially if the vote comes as early as June.

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I don’t think it is. This move was pretty tame, certainly compared to the measures announced 3 years when the BoJ went large on QE. By a slim majority, they voted to pay negative rates on a certain portion of excess reserves banks hold with the Bank of Japan. Hardly a big bazooka. What it did do was trip up the currency markets, which perhaps was their implicit hope, and if so it was relatively successful. But central banks struggle to stand in the way of underlying structural forces being exerted on a currency and that remains just as true for the BoJ and the yen as for most other central banks. The current account has been turning more positive for Japan over the past year and the yen usually follows that with a lag of 12-18 months. Put this against the backdrop of central banks struggling to make their expansionary policies effective, then it’s less likely that we are going to see a return to a positive risk environment. As such, structural and safe haven forces look likely to re-assert themselves on the Japanese currency in the coming month.

I’ve probably said it before, but I think the phrase ‘currency wars’ one of the more over-used and mis-used in finance. I think often the currency reaction is a by-product of the policy reaction. For sure, sometimes central bankers are looking squarely at the currency when they undertake certain actions, but as with the BoJ, they cannot stand in the way of the structural forces pulling the currency either up or down. Whilst inflation continues to undershoot expectations, then central bankers are going to keep the easy policy mantra.

If there is one thing harder to forecast than exchange rates, it’s the price of oil. So it’s impossible to say if USD 30/barrel is correct or not in my humble opinion. What I can say is that I think low oil prices are set to remain a feature of 2016. The dynamics of the oil market have changed dramatically over the past 5 years. The notion of the Middle East exporting oil to an energy dependent West is being undermined by greater energy efficiency, less dependency and technological improvements that mean an increase in proven reserves. But making these viable with the oil price down at these levels is naturally a big hurdle. At some point, supply will be constrained by the loss of output from shale producers. US oil production peaked in April last year, but output is still up 35% over the past 3 years and the correction (4% lower from peak) has been small in relation to this relentless rise.