WEBVTT - Borthwick Sees Great Dollar Weakness In Next Year Or So (Audio) 0:00:00.120 --> 0:00:02.599 So we did see movement in the markets today after 0:00:02.680 --> 0:00:07.520 the Federal Reserve issued a message that policy is not 0:00:07.760 --> 0:00:11.800 heading for interest rate increases anytime soon, if the economy 0:00:11.800 --> 0:00:14.000 does not pick up a more devast message in fact 0:00:14.040 --> 0:00:17.720 than the markets had expected. And in return, stocks up, 0:00:17.800 --> 0:00:20.560 bonds up in terms of price, down in terms of yield, 0:00:20.600 --> 0:00:24.239 dollar getting weaker touching a twenty month low versus the yen. 0:00:24.600 --> 0:00:27.280 That means that yen got a lot stronger, making the 0:00:27.400 --> 0:00:29.960 job much much harder for Prime Minister and the Make 0:00:30.000 --> 0:00:33.120 of Japan as they try to stimulate and boost Japan's economy. 0:00:33.520 --> 0:00:36.640 Connecting all the dots for us now is Douglas Borthwick. 0:00:36.720 --> 0:00:39.560 Doug is managing director and head of FFX at Chapter 0:00:39.600 --> 0:00:41.840 Lane and Co. Here in New York City. Welcome Doug, 0:00:42.159 --> 0:00:45.159 Thank you very much. So, first of all, the fact 0:00:45.280 --> 0:00:51.160 that more Fed officials now six out of seventeen, say 0:00:51.280 --> 0:00:54.800 only one rate increase this year compared with four rate 0:00:54.840 --> 0:00:58.360 hikes projected by the majority in December. Did that surprise you? 0:00:58.680 --> 0:01:00.560 And what does it mean for the Fed? Does it 0:01:00.600 --> 0:01:03.320 mean for the dollar going ahead? It didn't surprise me 0:01:03.320 --> 0:01:06.160 at all. If if you remember we spoke actually the 0:01:06.200 --> 0:01:08.600 end of December, and then we talked about how they 0:01:08.600 --> 0:01:11.280 wanted four more rate rises by the end of the 0:01:11.360 --> 0:01:13.559 year and how shocked I was that that was the case, 0:01:13.600 --> 0:01:15.000 and I think they had to come back to one 0:01:15.120 --> 0:01:17.160 or two. And I think that what we're seeing now 0:01:17.240 --> 0:01:19.600 is that one or two is coming back into focus. 0:01:19.640 --> 0:01:21.800 You know. I think that at the end of December, 0:01:22.080 --> 0:01:25.399 the Fed was just extremely optimistic, and yet their message 0:01:25.400 --> 0:01:27.560 when they raised rates seemed to be rather defensive rather 0:01:27.640 --> 0:01:29.920 than offensive. And I think that what they're doing now 0:01:29.959 --> 0:01:31.840 is they're catching up to the market and having that 0:01:31.920 --> 0:01:34.440 realization that, you know what, the economy isn't quite as 0:01:34.440 --> 0:01:38.240 strong as as they've expected. And I think that the 0:01:38.240 --> 0:01:41.520 the employment numbers that we saw obviously last week were 0:01:41.640 --> 0:01:44.200 terrible and that just made them obviously take a pause 0:01:44.240 --> 0:01:46.280 and decided that maybe we should put it off. I 0:01:46.280 --> 0:01:49.760 think that thinking that July will be the first rate rise, 0:01:49.840 --> 0:01:52.440 I think is are the second rate rise is obviously 0:01:52.480 --> 0:01:54.200 a little bit ahead of itself as well. So I 0:01:54.240 --> 0:01:55.560 think they were going to see maybe and you were 0:01:55.560 --> 0:01:57.760 talking in September now and we when we look at 0:01:57.760 --> 0:01:59.960 when they be raising rates, if they do, I think 0:02:00.000 --> 0:02:03.520 it's been a very big change in the market now 0:02:03.640 --> 0:02:06.600 since the last twenty and G seven meetings in that 0:02:06.720 --> 0:02:09.000 it seems that center banks have run their course in 0:02:09.080 --> 0:02:11.600 terms of CHEWI and seeing that as as the medicine 0:02:11.720 --> 0:02:14.919 for the weakness in the economies. And today I think 0:02:14.919 --> 0:02:16.560 that the FED really talked about how there is a 0:02:16.560 --> 0:02:19.359 difference between monitoring fiscal policy and what can be used 0:02:19.360 --> 0:02:21.440 for which. But also you saw the b O J 0:02:21.680 --> 0:02:23.840 last night commit or at least you had the chairman 0:02:23.919 --> 0:02:27.640 of Chairwoman of the l DTUH Tom only in Adu, 0:02:27.680 --> 0:02:30.200 who said the structural reforms and growth strategy is now 0:02:30.280 --> 0:02:32.679 much more important than que And I think that that's 0:02:32.680 --> 0:02:35.320 really what we're looking at is globally the center banks 0:02:35.320 --> 0:02:39.000 are more reticent about having their balance sheets rise considerably, 0:02:39.440 --> 0:02:41.600 and maybe their pointing neither their congresses or to the 0:02:41.680 --> 0:02:43.919 diet and saying, you know, maybe it's your turn to act, 0:02:44.919 --> 0:02:48.720 Mr Borthwick. Before we turn to September, we've got to 0:02:48.760 --> 0:02:52.160 pass through June. What do you think the voters in 0:02:52.200 --> 0:02:54.880 the United Kingdom will do and what do you think 0:02:54.919 --> 0:02:58.600 the repercussions will be. Well, that's the multibillion dollar question. 0:02:59.160 --> 0:03:02.840 I think that multi billion pound questions as well. Whatever 0:03:02.880 --> 0:03:05.760 you're trading it in that reality is we're trading at 0:03:05.760 --> 0:03:08.520 one forty two right now. That's you know, dollars to sterling. 0:03:09.160 --> 0:03:11.600 I think that if if they were to remain in 0:03:11.840 --> 0:03:14.560 um in in in the EU, you'll probably see a 0:03:14.639 --> 0:03:16.800 rally up to the round the one fifty level and stuff, 0:03:16.840 --> 0:03:20.120 but a five move. If they decide to exit, then 0:03:20.160 --> 0:03:22.320 we're talking about going down to maybe one thirties, which 0:03:22.360 --> 0:03:24.520 is around in eight percent move or twelve big figures. 0:03:25.160 --> 0:03:28.160 I think that this is a truly binary event, and 0:03:28.200 --> 0:03:31.280 we have very few binary events in the FX market. 0:03:31.280 --> 0:03:34.520 But by binary, I mean it really is a fifty 0:03:34.560 --> 0:03:36.760 fifty bet here and if you have a position going 0:03:36.760 --> 0:03:38.920 into it, you're either very right or you're very wrong. 0:03:39.720 --> 0:03:41.560 And I think that there's a lot of complacency in 0:03:41.600 --> 0:03:45.600 the market, namely because as you look back in the past, 0:03:45.640 --> 0:03:47.640 and I think that the Scottish referendum maybe is a 0:03:47.640 --> 0:03:50.680 good example here. In the Scottish referendum, it was around 0:03:50.680 --> 0:03:53.440 that fifty fifty level, but then when it actually came 0:03:53.520 --> 0:03:56.480 down to people making the decision on how they were 0:03:56.480 --> 0:03:58.280 going to vote, there was there were a lot more 0:03:59.000 --> 0:04:00.800 it'd rather vote with the out as quoted, with the 0:04:00.800 --> 0:04:03.560 way things were as opposed to making a change, and 0:04:03.600 --> 0:04:06.400 I think that that's really what the remain folks are 0:04:06.440 --> 0:04:08.720 relying on, is that people don't want to take the 0:04:08.840 --> 0:04:11.920 change and change is risky and so let's remain. However, 0:04:11.960 --> 0:04:14.080 I think one of the major points are that the 0:04:14.120 --> 0:04:18.159 big turnarounds was that the Sun newspaper, which really is 0:04:18.160 --> 0:04:20.760 a voice of the people in the UK, came out 0:04:20.760 --> 0:04:22.080 a couple of days ago and said, you know, it's 0:04:22.080 --> 0:04:24.560 time for exit. I think that now the exit, you 0:04:24.600 --> 0:04:26.560 see the exit polls ticking up, tacking up. Now, the 0:04:26.560 --> 0:04:29.080 exit polls seemed to be getting ahead of themselves as 0:04:29.120 --> 0:04:32.279 compared to the the betting numbers and the betting polls 0:04:32.320 --> 0:04:35.360 which are still pointing towards them remaining. And this really 0:04:35.400 --> 0:04:37.560 makes it a very very interesting play. I think that 0:04:37.600 --> 0:04:39.760 there will be few people sleeping in the foreign exchange 0:04:39.800 --> 0:04:45.000 world on NAP. I can only agree with you, Doug. 0:04:45.160 --> 0:04:49.600 And of course are Bloomberg news stories out of London 0:04:49.960 --> 0:04:53.120 covering the surveys and the polls point out that there's 0:04:53.160 --> 0:04:57.120 been lots of times a misque from the poll to 0:04:57.160 --> 0:04:59.560 the vote, because when the undecided is getting the booth, 0:05:00.120 --> 0:05:03.200 they are the ones who tipped the balance, But so 0:05:03.200 --> 0:05:05.600 so what do you so look out ahead? Is the 0:05:05.880 --> 0:05:11.880 is the Brexit vote so potentially destabilizing to Europe, to 0:05:11.960 --> 0:05:15.479 the euro area that you really can't tell us today 0:05:15.520 --> 0:05:17.559 what your call is for the dollar and the euro 0:05:17.680 --> 0:05:20.680 it's and even the yen until you know how that 0:05:20.760 --> 0:05:22.920 vote goes, or you say you'll get through it. You'll 0:05:22.960 --> 0:05:25.239 have a big reaction for a week at the world 0:05:25.240 --> 0:05:29.280 won't end and the currency trades, the currency trends continue 0:05:29.720 --> 0:05:33.240 well if there's certainly whatever happens with the sterling vote. 0:05:34.160 --> 0:05:36.440 When you look at the ripples, the biggest ripple officer 0:05:36.560 --> 0:05:38.039 is gonna be where the stone drops, which is going 0:05:38.120 --> 0:05:40.440 to be how sterling trades versus all other currencies, a 0:05:40.480 --> 0:05:43.159 sterling yen, euro against the sterling, sterling against the dollar. 0:05:43.960 --> 0:05:46.120 After that, as you look towards dollar yen, you probably 0:05:46.120 --> 0:05:48.280 see because people will sell sterling and buy in the 0:05:48.360 --> 0:05:50.880 dollar and feel pressure on the downside. If the UK 0:05:51.040 --> 0:05:53.320 was to exit with the euros sterling, you'd probably see 0:05:53.320 --> 0:05:55.919 people buying euros and selling sterling. If the UK was 0:05:55.920 --> 0:05:58.240 to vote to exit, and so you're sterling would rally. 0:05:58.560 --> 0:06:01.000 These sorts of moves would really be over the course 0:06:01.040 --> 0:06:03.200 of a couple of weeks, because remember, if they decided 0:06:03.240 --> 0:06:05.640 to exit, they still have to plan how they would exit, 0:06:06.080 --> 0:06:08.800 and so the numbers aren't really there or the data 0:06:08.839 --> 0:06:11.159 isn't there, and and it's not something that happens overnight. 0:06:11.200 --> 0:06:13.080 It's sudden that happens over the next number of years. 0:06:13.720 --> 0:06:15.960 And so I think you get you get this knee 0:06:16.000 --> 0:06:18.440 jerk reaction and then the markets will calm down somewhat. 0:06:18.720 --> 0:06:20.800 I think that there is a huge trend in place 0:06:20.880 --> 0:06:23.240 right now where you see yen strength and euro strength 0:06:23.640 --> 0:06:26.040 and I and and dollar weakness. And I've been saying 0:06:26.080 --> 0:06:28.520 this since December and then I believe that that's because 0:06:28.560 --> 0:06:31.039 you're seeing some central banks or reserve managers in the 0:06:31.040 --> 0:06:34.479 world start to diversify out of their overweight position in 0:06:34.520 --> 0:06:37.160 dollars and into the end and into the euro. If 0:06:37.160 --> 0:06:39.240 you'll notice, you'll see the ten year paper now in 0:06:39.279 --> 0:06:41.440 Europe and in Japan is now negative. In the US 0:06:41.480 --> 0:06:43.600 it's still US is now one of the high yowlders 0:06:43.600 --> 0:06:45.719 in the ten year market. And I do believe that 0:06:45.760 --> 0:06:48.919 there is there is an interest, primarily out of the 0:06:49.040 --> 0:06:53.039 largest Asian reserve managers to right now sell a dollar 0:06:53.120 --> 0:06:55.080 by euros and by yen, and I think it's because 0:06:55.160 --> 0:06:58.120 instead of monitoring their currency against the dollar, the Chinese 0:06:58.120 --> 0:07:02.119 specifically are now monitoring their currency verse the basket. If 0:07:02.240 --> 0:07:06.000 the UK voters decided to leave the European Union, will 0:07:06.040 --> 0:07:10.640 there be other countries to hold similar referendums. Well, remember 0:07:10.680 --> 0:07:14.120 it's not this isn't a vote about the UK leaving 0:07:14.240 --> 0:07:17.480 the Euro per se. This is then relieving the trade 0:07:17.560 --> 0:07:20.880 zone or the European Union. So there could be a 0:07:20.920 --> 0:07:22.600 discussion of that. But I think that if you're a 0:07:22.600 --> 0:07:25.080 member of the euro the arts of you leaving the 0:07:25.080 --> 0:07:28.440 EU are considerably lower than the UK. And the UK 0:07:28.560 --> 0:07:31.000 really is a specific example and that it doesn't share 0:07:31.000 --> 0:07:34.119 the euro currency, but it is part of the euro Union, 0:07:34.800 --> 0:07:38.200 and so for for trade reasons it's rather important. The 0:07:38.320 --> 0:07:40.720 knock on effect or the domino effect from this is 0:07:41.240 --> 0:07:43.480 if the UK is to vote to leave the Euro 0:07:43.880 --> 0:07:46.920 the euro Zone, you'll probably find Scotland then calling for 0:07:46.960 --> 0:07:51.440 a further referendum because around six Scottish voters would like 0:07:51.480 --> 0:07:54.120 to remain part of the European Union, and it's been 0:07:54.160 --> 0:07:58.240 mentioned a number of times that should the English essentially 0:07:58.280 --> 0:08:01.360 vote to move away, then Scotland may vote again to 0:08:01.520 --> 0:08:03.880 move away from England, and so I think that's important. 0:08:03.920 --> 0:08:06.200 But then as you see people talk about independence and 0:08:06.240 --> 0:08:09.640 you see referendums, then people worry about what could happen 0:08:09.640 --> 0:08:11.960 in Canada because they're spoken quebective would also like to 0:08:12.000 --> 0:08:14.720 have independence, What could happen in the Basque areas, what 0:08:14.800 --> 0:08:18.040 could happen? And there's lots of different zones in Europe 0:08:18.040 --> 0:08:19.720 as well. There's people that think about, you know what, 0:08:19.760 --> 0:08:22.040 we'd like to be independent and have our own country, 0:08:22.160 --> 0:08:26.240 and that creates destabilization and obviously volatility. I just want 0:08:26.240 --> 0:08:28.520 to give me a wild forecast, or are not so wild? 0:08:28.720 --> 0:08:32.440 If the vote is to leave, how low does the 0:08:32.480 --> 0:08:35.199 pound go, where does the dollar go, where does young go? 0:08:36.280 --> 0:08:37.520 If they were to vote to leave. I think you 0:08:37.640 --> 0:08:40.520 probably see sterling drop off too. As I've said, right 0:08:40.559 --> 0:08:42.800 around the one thirty level. I think I don't think 0:08:42.800 --> 0:08:44.800 you're going to see it drop much more than that, 0:08:44.880 --> 0:08:47.440 and that's around an eight percent move lower that could 0:08:47.440 --> 0:08:50.719 happen rather quickly. Now, obviously central banks are going to 0:08:50.760 --> 0:08:52.719 step in and talk about liquidity. You'll probably see that 0:08:52.760 --> 0:08:55.360 stabilize somewhat. But I do think over time you're going 0:08:55.440 --> 0:08:57.600 to see great dollar weakness over the next year or so. 0:08:58.120 --> 0:09:00.240 Thank you very much for joining US Douglas Board quick 0:09:00.280 --> 0:09:05.760 as managing director the head OFFX at Chapter Laine and Company. 0:09:05.840 --> 0:09:10.880 Right now, the British pounds sterling at one forty two twelve, 0:09:11.360 --> 0:09:14.520 in the euro at one twelve sixty four. You're listening 0:09:14.520 --> 0:09:16.440 to taking Stock on Blueberg Radio.