Saturday, 28 November 2015

Dovish hike? Our panelists' thoughts on FX

18:17 Posted by The Thalesians (@thalesians) No comments

I have always been a firm believer that having discussions with other market participants is a powerful way to test your own views, both for discretionary and quant traders. Furthermore it can be an important way to understand how the market is positioned and to see how your views fit into that. As a result, over the past few years, we have organised several very lively macro panels at the Thalesians. They have been a great way to hear the views of many market experts. Furthermore, they've always been great fun.

Last Thursday, we had our latest macro panel at the Thalesians in London. I moderated an expert panel, which featured Eric Burroughs (Editor of FX Buzz - Reuters), Mark Cudmore (EM strategist - Bloomberg), Mick Grady (Multi-asset strategist & economist - Aviva), Ashraf Laidi (Strategist - Intermarket Strategy) and Jeremy Wilkinson-Smith (Independent). We touched on a number of different areas within macro markets, including the Fed, views on USD, as well as EM. We rounded off the discussion by hearing about the panellists' favourite views for the coming months in macro space.

I began the discussion by asking the panel's view on USD and the prospects of a Fed hike in December. The panel's view on the USD was perhaps more cautious than previous panels, where the view had been much more bullish. Among the panelists, there seemed to be near unanimous agreement that the Fed would hike in December. Cudmore suggested that the long USD trade is not over, however, he also believed the easy part of the USD trade is now over, and will be characterised by higher volatility. Wilkinson-Smith echoed this sentiment to some extent, noting that the risk reward is not there good for being long USD, with potential for squeezes on day of the Fed hike, especially given the possibility that the Fed would be conducting a "dovish hike".

Grady was more constructive on the dollar. Further ahead, he believed that the Fed is likely to hike more rapidly than what has been priced into the market, on the back of his more bullish view on the US economy. He also noted that his bullish USD view was helped by the Fed's policy divergence with both ECB and BoJ, which both remain in easing mode. In the short term, Burroughs suggested there was room for a short term covering rally in EUR/USD. He noted that one supporting reason was that the market was long gamma. However, following that, he could see a move back towards parity for EUR/USD. He agreed with Grady's view that the Fed could hike more than the market expected. Burroughs noted that the market is not prepared for further downside in EUR/USD, citing the median 12m forecast on Reuters is 1.05, and very few forecasting below parity, aside from Reuters' team forecast at 0.94 and a few other forecasters.

Laidi thought there was not much further downside in EUR/USD and over time spot could go higher. He suggested that the Fed would not hike in December, disagreeing with the rest of the panel. He was bearish on the US economy expecting the spectre of recession to return to the USA next year. Laidi also believed that USD strength would make it difficult for the Fed to hike. The panel broadly agreed that there wasn't much credence in the notion that the Fed would hike, purely to cut later. Wilkinson-Smith argued that if they really wanted to stimulate the economy, a more obvious path would be QE. There was also the question of the impact of the USD move as "tightening". Grady suggested that tightening due to USD strength, was equivalent to 2 to 3 rate hikes. The panel also discussed the potential reaction of equities on a Fed hike. Grady, thought that a hike would be welcomed by equities, given that it could be viewed as a vote of confidence.

On USD/JPY, there was consensus that we have already seen the high. Laidi suggested there could some downside in spot from here. Burroughs noted that the JPY is very weak on long term valuation metrics. He noted that the BoJ has been getting to limits of what more it can do. On Japanese equities, Grady was bullish, noting there was room for reallocation from retail, which was underweight.

Taking the discussion towards EM, Cudmore noted that the best performing currencies were INR, RUB and CHN (excluding ARS, which is much less liquid). Cudmore was bullish on INR, citing that it was growing strongly. He noted other opportunities in Asia, which remain comparatively cheap, such as PHP, also driven by strong growth. However, his view on EM, was not universally bullish. Notably he was bearish on ZAR and also BRL. Grady suggested that on EM, you need to pick your spots carefully. He agreed with Cudmore on the bearish BRL view citing massive current deficit and very high inflation, among other factors.

I ended the panel by asking what the panelists favourite views. Cudmore was bullish INR vs CAD. Grady saw upside in AUD/CAD, based on the differences in the non-commodity sectors, citing the green shoots in the Australian economy. Wilkinson-Smith suggested receiving AUD rates. He didn't see RBA hiking rates, with the state of their terms of trade. In FX space, he saw AUD/NOK downside, citing his constructive view on crude versus his bearishness on Australia's biggest commodities, such as iron and copper. Burroughs suggested being overweight PLN. Among Laidi's favourite views, was downside in GBP/AUD.

I hope to organise further Thalesians macro panels in the future, mostly likely in the spring. We hope to see you at the next panel!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our group for more details here (Thalesians calendar below)

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)


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