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Borthwick Sees Great Dollar Weakness In Next Year Or So (Audio) · Bloomberg Intelligence

• 0:00
  Speaker 1: So we did see movement in the markets today after
• 0:02
  Speaker 1: the Federal Reserve issued a message that policy is not
• 0:07
  Speaker 1: heading for interest rate increases anytime soon, if the economy
• 0:11
  Speaker 1: does not pick up a more devast message in fact
• 0:14
  Speaker 1: than the markets had expected. And in return, stocks up,
• 0:17
  Speaker 1: bonds up in terms of price, down in terms of yield,
• 0:20
  Speaker 1: dollar getting weaker touching a twenty month low versus the yen.
• 0:24
  Speaker 1: That means that yen got a lot stronger, making the
• 0:27
  Speaker 1: job much much harder for Prime Minister and the Make
• 0:30
  Speaker 1: of Japan as they try to stimulate and boost Japan's economy.
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  Speaker 1: Connecting all the dots for us now is Douglas Borthwick.
• 0:36
  Speaker 1: Doug is managing director and head of FFX at Chapter
• 0:39
  Speaker 1: Lane and Co. Here in New York City. Welcome Doug,
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  Speaker 1: Thank you very much. So, first of all, the fact
• 0:45
  Speaker 1: that more Fed officials now six out of seventeen, say
• 0:51
  Speaker 1: only one rate increase this year compared with four rate
• 0:54
  Speaker 1: hikes projected by the majority in December. Did that surprise you?
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  Speaker 1: And what does it mean for the Fed? Does it
• 1:00
  Speaker 1: mean for the dollar going ahead? It didn't surprise me
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  Speaker 1: at all. If if you remember we spoke actually the
• 1:06
  Speaker 1: end of December, and then we talked about how they
• 1:08
  Speaker 1: wanted four more rate rises by the end of the
• 1:11
  Speaker 1: year and how shocked I was that that was the case,
• 1:13
  Speaker 1: and I think they had to come back to one
• 1:15
  Speaker 1: or two. And I think that what we're seeing now
• 1:17
  Speaker 1: is that one or two is coming back into focus.
• 1:19
  Speaker 1: You know. I think that at the end of December,
• 1:22
  Speaker 1: the Fed was just extremely optimistic, and yet their message
• 1:25
  Speaker 1: when they raised rates seemed to be rather defensive rather
• 1:27
  Speaker 1: than offensive. And I think that what they're doing now
• 1:29
  Speaker 1: is they're catching up to the market and having that
• 1:31
  Speaker 1: realization that, you know what, the economy isn't quite as
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  Speaker 1: strong as as they've expected. And I think that the
• 1:38
  Speaker 1: the employment numbers that we saw obviously last week were
• 1:41
  Speaker 1: terrible and that just made them obviously take a pause
• 1:44
  Speaker 1: and decided that maybe we should put it off. I
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  Speaker 1: think that thinking that July will be the first rate rise,
• 1:49
  Speaker 1: I think is are the second rate rise is obviously
• 1:52
  Speaker 1: a little bit ahead of itself as well. So I
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  Speaker 1: think they were going to see maybe and you were
• 1:55
  Speaker 1: talking in September now and we when we look at
• 1:57
  Speaker 1: when they be raising rates, if they do, I think
• 2:00
  Speaker 1: it's been a very big change in the market now
• 2:03
  Speaker 1: since the last twenty and G seven meetings in that
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  Speaker 1: it seems that center banks have run their course in
• 2:09
  Speaker 1: terms of CHEWI and seeing that as as the medicine
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  Speaker 1: for the weakness in the economies. And today I think
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  Speaker 1: that the FED really talked about how there is a
• 2:16
  Speaker 1: difference between monitoring fiscal policy and what can be used
• 2:19
  Speaker 1: for which. But also you saw the b O J
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  Speaker 1: last night commit or at least you had the chairman
• 2:23
  Speaker 1: of Chairwoman of the l DTUH Tom only in Adu,
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  Speaker 1: who said the structural reforms and growth strategy is now
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  Speaker 1: much more important than que And I think that that's
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  Speaker 1: really what we're looking at is globally the center banks
• 2:35
  Speaker 1: are more reticent about having their balance sheets rise considerably,
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  Speaker 1: and maybe their pointing neither their congresses or to the
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  Speaker 1: diet and saying, you know, maybe it's your turn to act,
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  Speaker 1: Mr Borthwick. Before we turn to September, we've got to
• 2:48
  Speaker 1: pass through June. What do you think the voters in
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  Speaker 1: the United Kingdom will do and what do you think
• 2:54
  Speaker 1: the repercussions will be. Well, that's the multibillion dollar question.
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  Speaker 1: I think that multi billion pound questions as well. Whatever
• 3:02
  Speaker 1: you're trading it in that reality is we're trading at
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  Speaker 1: one forty two right now. That's you know, dollars to sterling.
• 3:09
  Speaker 1: I think that if if they were to remain in
• 3:11
  Speaker 1: um in in in the EU, you'll probably see a
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  Speaker 1: rally up to the round the one fifty level and stuff,
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  Speaker 1: but a five move. If they decide to exit, then
• 3:20
  Speaker 1: we're talking about going down to maybe one thirties, which
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  Speaker 1: is around in eight percent move or twelve big figures.
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  Speaker 1: I think that this is a truly binary event, and
• 3:28
  Speaker 1: we have very few binary events in the FX market.
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  Speaker 1: But by binary, I mean it really is a fifty
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  Speaker 1: fifty bet here and if you have a position going
• 3:36
  Speaker 1: into it, you're either very right or you're very wrong.
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  Speaker 1: And I think that there's a lot of complacency in
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  Speaker 1: the market, namely because as you look back in the past,
• 3:45
  Speaker 1: and I think that the Scottish referendum maybe is a
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  Speaker 1: good example here. In the Scottish referendum, it was around
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  Speaker 1: that fifty fifty level, but then when it actually came
• 3:53
  Speaker 1: down to people making the decision on how they were
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  Speaker 1: going to vote, there was there were a lot more
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  Speaker 1: it'd rather vote with the out as quoted, with the
• 4:00
  Speaker 1: way things were as opposed to making a change, and
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  Speaker 1: I think that that's really what the remain folks are
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  Speaker 1: relying on, is that people don't want to take the
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  Speaker 1: change and change is risky and so let's remain. However,
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  Speaker 1: I think one of the major points are that the
• 4:14
  Speaker 1: big turnarounds was that the Sun newspaper, which really is
• 4:18
  Speaker 1: a voice of the people in the UK, came out
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  Speaker 1: a couple of days ago and said, you know, it's
• 4:22
  Speaker 1: time for exit. I think that now the exit, you
• 4:24
  Speaker 1: see the exit polls ticking up, tacking up. Now, the
• 4:26
  Speaker 1: exit polls seemed to be getting ahead of themselves as
• 4:29
  Speaker 1: compared to the the betting numbers and the betting polls
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  Speaker 1: which are still pointing towards them remaining. And this really
• 4:35
  Speaker 1: makes it a very very interesting play. I think that
• 4:37
  Speaker 1: there will be few people sleeping in the foreign exchange
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  Speaker 1: world on NAP. I can only agree with you, Doug.
• 4:45
  Speaker 1: And of course are Bloomberg news stories out of London
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  Speaker 1: covering the surveys and the polls point out that there's
• 4:53
  Speaker 1: been lots of times a misque from the poll to
• 4:57
  Speaker 1: the vote, because when the undecided is getting the booth,
• 5:00
  Speaker 1: they are the ones who tipped the balance, But so
• 5:03
  Speaker 1: so what do you so look out ahead? Is the
• 5:05
  Speaker 1: is the Brexit vote so potentially destabilizing to Europe, to
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  Speaker 1: the euro area that you really can't tell us today
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  Speaker 1: what your call is for the dollar and the euro
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  Speaker 1: it's and even the yen until you know how that
• 5:20
  Speaker 1: vote goes, or you say you'll get through it. You'll
• 5:22
  Speaker 1: have a big reaction for a week at the world
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  Speaker 1: won't end and the currency trades, the currency trends continue
• 5:29
  Speaker 1: well if there's certainly whatever happens with the sterling vote.
• 5:34
  Speaker 1: When you look at the ripples, the biggest ripple officer
• 5:36
  Speaker 1: is gonna be where the stone drops, which is going
• 5:38
  Speaker 1: to be how sterling trades versus all other currencies, a
• 5:40
  Speaker 1: sterling yen, euro against the sterling, sterling against the dollar.
• 5:43
  Speaker 1: After that, as you look towards dollar yen, you probably
• 5:46
  Speaker 1: see because people will sell sterling and buy in the
• 5:48
  Speaker 1: dollar and feel pressure on the downside. If the UK
• 5:51
  Speaker 1: was to exit with the euros sterling, you'd probably see
• 5:53
  Speaker 1: people buying euros and selling sterling. If the UK was
• 5:55
  Speaker 1: to vote to exit, and so you're sterling would rally.
• 5:58
  Speaker 1: These sorts of moves would really be over the course
• 6:01
  Speaker 1: of a couple of weeks, because remember, if they decided
• 6:03
  Speaker 1: to exit, they still have to plan how they would exit,
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  Speaker 1: and so the numbers aren't really there or the data
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  Speaker 1: isn't there, and and it's not something that happens overnight.
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  Speaker 1: It's sudden that happens over the next number of years.
• 6:13
  Speaker 1: And so I think you get you get this knee
• 6:16
  Speaker 1: jerk reaction and then the markets will calm down somewhat.
• 6:18
  Speaker 1: I think that there is a huge trend in place
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  Speaker 1: right now where you see yen strength and euro strength
• 6:23
  Speaker 1: and I and and dollar weakness. And I've been saying
• 6:26
  Speaker 1: this since December and then I believe that that's because
• 6:28
  Speaker 1: you're seeing some central banks or reserve managers in the
• 6:31
  Speaker 1: world start to diversify out of their overweight position in
• 6:34
  Speaker 1: dollars and into the end and into the euro. If
• 6:37
  Speaker 1: you'll notice, you'll see the ten year paper now in
• 6:39
  Speaker 1: Europe and in Japan is now negative. In the US
• 6:41
  Speaker 1: it's still US is now one of the high yowlders
• 6:43
  Speaker 1: in the ten year market. And I do believe that
• 6:45
  Speaker 1: there is there is an interest, primarily out of the
• 6:49
  Speaker 1: largest Asian reserve managers to right now sell a dollar
• 6:53
  Speaker 1: by euros and by yen, and I think it's because
• 6:55
  Speaker 1: instead of monitoring their currency against the dollar, the Chinese
• 6:58
  Speaker 1: specifically are now monitoring their currency verse the basket. If
• 7:02
  Speaker 1: the UK voters decided to leave the European Union, will
• 7:06
  Speaker 1: there be other countries to hold similar referendums. Well, remember
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  Speaker 1: it's not this isn't a vote about the UK leaving
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  Speaker 1: the Euro per se. This is then relieving the trade
• 7:17
  Speaker 1: zone or the European Union. So there could be a
• 7:20
  Speaker 1: discussion of that. But I think that if you're a
• 7:22
  Speaker 1: member of the euro the arts of you leaving the
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  Speaker 1: EU are considerably lower than the UK. And the UK
• 7:28
  Speaker 1: really is a specific example and that it doesn't share
• 7:31
  Speaker 1: the euro currency, but it is part of the euro Union,
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  Speaker 1: and so for for trade reasons it's rather important. The
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  Speaker 1: knock on effect or the domino effect from this is
• 7:41
  Speaker 1: if the UK is to vote to leave the Euro
• 7:43
  Speaker 1: the euro Zone, you'll probably find Scotland then calling for
• 7:46
  Speaker 1: a further referendum because around six Scottish voters would like
• 7:51
  Speaker 1: to remain part of the European Union, and it's been
• 7:54
  Speaker 1: mentioned a number of times that should the English essentially
• 7:58
  Speaker 1: vote to move away, then Scotland may vote again to
• 8:01
  Speaker 1: move away from England, and so I think that's important.
• 8:03
  Speaker 1: But then as you see people talk about independence and
• 8:06
  Speaker 1: you see referendums, then people worry about what could happen
• 8:09
  Speaker 1: in Canada because they're spoken quebective would also like to
• 8:12
  Speaker 1: have independence, What could happen in the Basque areas, what
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  Speaker 1: could happen? And there's lots of different zones in Europe
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  Speaker 1: as well. There's people that think about, you know what,
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  Speaker 1: we'd like to be independent and have our own country,
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  Speaker 1: and that creates destabilization and obviously volatility. I just want
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  Speaker 1: to give me a wild forecast, or are not so wild?
• 8:28
  Speaker 1: If the vote is to leave, how low does the
• 8:32
  Speaker 1: pound go, where does the dollar go, where does young go?
• 8:36
  Speaker 1: If they were to vote to leave. I think you
• 8:37
  Speaker 1: probably see sterling drop off too. As I've said, right
• 8:40
  Speaker 1: around the one thirty level. I think I don't think
• 8:42
  Speaker 1: you're going to see it drop much more than that,
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  Speaker 1: and that's around an eight percent move lower that could
• 8:47
  Speaker 1: happen rather quickly. Now, obviously central banks are going to
• 8:50
  Speaker 1: step in and talk about liquidity. You'll probably see that
• 8:52
  Speaker 1: stabilize somewhat. But I do think over time you're going
• 8:55
  Speaker 1: to see great dollar weakness over the next year or so.
• 8:58
  Speaker 1: Thank you very much for joining US Douglas Board quick
• 9:00
  Speaker 1: as managing director the head OFFX at Chapter Laine and Company.
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  Speaker 1: Right now, the British pounds sterling at one forty two twelve,
• 9:11
  Speaker 1: in the euro at one twelve sixty four. You're listening
• 9:14
  Speaker 1: to taking Stock on Blueberg Radio.