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Speaker 1: Lots of movement right now in the foreign exchange. Let's

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Speaker 1: take a closer look with our guest Paul Mackle. He

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Speaker 1: is Global head of x FX Research at HSBC and

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Speaker 1: Paul joins from our studios in Hong Kong. Happy New Year, Paul,

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Speaker 1: thanks for being with us. A lot going on. I

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Speaker 1: gotta begin with this move in the end here. I mean,

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Speaker 1: it's been a monster a couple of days for the

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Speaker 1: Japanese currency, particularly against the greenback. Is this all b

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Speaker 1: O J driven? Do you think? Uh? The short answer

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Speaker 1: is no, I don't think so. I think that you know,

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Speaker 1: if we go back to all the headlines that we're

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Speaker 1: reading on the wires right now, there's lots of uncertainties.

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Speaker 1: The mood music for many different policymakers or politicians globally

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Speaker 1: is talking about don side risk to global global growth

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Speaker 1: and and the end, the way it's performing is that

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Speaker 1: some of that safe haven tone for the currency seems

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Speaker 1: to be working better, much better than what we had

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Speaker 1: in two thousand and twenty two. So so to sum up,

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Speaker 1: I don't think it's just a function of of how

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Speaker 1: the Bank Japan tweaked its yield curve control framework. I

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Speaker 1: think that yes, the mood has been boying the end

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Speaker 1: for some time, but also for the right reasons. Do

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Speaker 1: you suspect that that perhaps was just the start from

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Speaker 1: the Bank of Japan. We're already expecting a change to

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Speaker 1: the inflation outlook at the end of the month. Governor

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Speaker 1: courageous term ends in April. Is three going to be

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Speaker 1: the year we we see some real action. I think

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Speaker 1: the speculation about what they could be doing next is

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Speaker 1: not easily going to be going away. But what we

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Speaker 1: also have to see playing out is what happens with

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Speaker 1: the wage negotiations in Japan within the next few months.

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Speaker 1: Does that really increase a lot, which would then give

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Speaker 1: further reason for for the Bank of Japan or the

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Speaker 1: market to think that the Bank of Japan could have

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Speaker 1: to be even bolder. But you know, for now, our

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Speaker 1: baseline scenario is that they've they've done their tweak. They're

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Speaker 1: going to sit back and probably watch how the inflation

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Speaker 1: panorama develops, particularly with wages. But I don't see any

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Speaker 1: sudden need for them to to change right now. A

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Speaker 1: little bit of a different story here in the US.

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Speaker 1: A lot is going to become clear when we get

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Speaker 1: the employment data at the end of the week, particularly

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Speaker 1: the wage component. I think our survey is looking for

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Speaker 1: average hourly earnings rising about five percent a month alone

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Speaker 1: compared to last year. So assume for the moment that

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Speaker 1: the FED is going to remain aggressive. Yes, we've moved

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Speaker 1: from seventy five down to fifty, but the intentionality behind

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Speaker 1: that remains the same. Does that necessarily mean that the

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Speaker 1: dollar remains on the course that it's been or is

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Speaker 1: it going to waiver a little bit? I'm trying to

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Speaker 1: understand where the dollar is, particularly given everything you're unpacking

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Speaker 1: there with the end. Yeah. Absolutely, I mean it's it's

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Speaker 1: a critical question right now because the dollars sell off

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Speaker 1: since well the d x Y s peak in in

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Speaker 1: late September has been absolutely astonishing. And you know what,

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Speaker 1: was looking at one of the biggest or most bullish

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Speaker 1: dollar trends that we've had in at least a couple

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Speaker 1: of decades turned out into being such a ending on

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Speaker 1: such a whimper. And I think we need to be

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Speaker 1: careful here because, as you're absolutely right, if we get

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Speaker 1: another strong set of wage numbers or the next round

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Speaker 1: of of CPI data is on the high side versus expectations,

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Speaker 1: and the fed has to come up, come out pushing

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Speaker 1: back against any type of race cuts developing in the market.

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Speaker 1: Then yes, that could that could squeeze the dollar higher

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Speaker 1: versus a number of different currencies. So absolutely, I think

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Speaker 1: we need to be a little bit careful here about

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Speaker 1: getting overly complacent on on on on being negative on

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Speaker 1: the on the U. S. Dollar. Um, although your your

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Speaker 1: baseline is that you know we have seen the peak

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Speaker 1: in the U. S. Dollar, right, Um, that's correct. Yeah,

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Speaker 1: So which currencies you see as being the biggest gain

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Speaker 1: is against the green back? In well, I mean the

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Speaker 1: pace of the decline has been absolutely, as I said,

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Speaker 1: so powerful in the last couple of months. So when

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Speaker 1: we we could see a squeeze in the dollar, I

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Speaker 1: don't think it would be a sustainable one. I think

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Speaker 1: it would be still the setup of of looking for

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Speaker 1: the opportunity to still sell it or fade it in

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Speaker 1: terms of the biggest outperformers. Even into into account the

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Speaker 1: weakness that has unfolded for the green back, look, I

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Speaker 1: think that the end is still going to be a

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Speaker 1: fair fairly resilient currency. I think that the European currencies

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Speaker 1: will still be benefiting more by default than than Marathe

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Speaker 1: they could be grinding higher. I think the Ausy dollar

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Speaker 1: is is a very interesting currency has I think some

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Speaker 1: strong upside potential there, particularly at China's economy is becoming

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Speaker 1: more online as we roll into the second quarter. So

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Speaker 1: I think top picks amongst the major currencies at least

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Speaker 1: would be the Ausy dollars. Well, I want to get

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Speaker 1: your take on the Chinese currency. That was quite the

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Speaker 1: rally that we had in the off shore last Friday.

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Speaker 1: Some of that was tied to the PBOC saying that

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Speaker 1: on shore trading hours will be extended. But I think

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Speaker 1: if you look at maybe you can agree that the

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Speaker 1: fundamentals on the China story, particularly given everything that's happening

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Speaker 1: with COVID that has not changed. Why if it's not

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Speaker 1: tied to a shift in trading hours, what's going on

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Speaker 1: with the Chinese currency that would account for the strengthening. Well,

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Speaker 1: two things I think First is what we were discussing earlier.

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Speaker 1: I mean, this is the dollar itself is soft versus

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Speaker 1: many different currencies, and the remambe can't defy gravity. When

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Speaker 1: that you know that weaknesses is unfolding for for for

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Speaker 1: the U. S. Dollar. The second thing comes down to well,

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Speaker 1: there's been probably quite a big build up of FX

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Speaker 1: proceeds long dollar positions by you know, Chinese entities for

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Speaker 1: some time. And if they're looking at what's happening in

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Speaker 1: the FX market and this week dollar, do they really

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Speaker 1: want to be holding onto all those dollars? And the

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Speaker 1: answer is probably not. So most likely they've been converting

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Speaker 1: more of those f X proceeds, and I think that's

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Speaker 1: been playing to the remambees advantage despite the soggy fundamentals

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Speaker 1: on on the ground. Do you see his tasting saving

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Speaker 1: again for the show? You on? Not unless we have

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Speaker 1: a corrective move higher by the US dollar by against

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Speaker 1: many different currencies. I don't think so. But like, let's

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Speaker 1: not rule it out completely because there's still a lot

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Speaker 1: of uncertainties about how things are gonna be unfolding for

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Speaker 1: for China's economy within the next couple of months, reopening

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Speaker 1: the COVID situation on the ground, so it's possible, but

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Speaker 1: I don't think it's going to be a sustainable move

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Speaker 1: than anything else we heard from the I m F

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Speaker 1: director Christelina Joe gave a short while ago saying half

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Speaker 1: of Europe is going to be in recession next year.

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Speaker 1: And I'm trying to understand the strengthening in the Euro,

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Speaker 1: I mean, parody against the green bag. I can understand

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Speaker 1: when you're talking about recession going across the continent right now.

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Speaker 1: Is this a situation that we should take a closer

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Speaker 1: look at your dollar Euro? Well, recession probabilities for for

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Speaker 1: many European economies have have been rising for over the

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Speaker 1: last year, So is it new news. I I would

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Speaker 1: push back against that, but I'm wondering about the strengthening though. Yeah, Well,

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Speaker 1: I think that this is you know, it comes back

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Speaker 1: down to the bigger dollar itself, because what's been critical

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Speaker 1: to that is that just some of the uncertainty about

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Speaker 1: the FED or belief that they have to do a

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Speaker 1: lot more in terms of raising industrates, that story is

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Speaker 1: coming to an end. And I think that's giving a

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Speaker 1: lot of relief to to many different currencies, even those

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Speaker 1: that are facing quite a challenging economic outlook, namely those

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Speaker 1: in in Europe. So I talked about European currencies benefiting

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Speaker 1: more by default than merit. I think that's explains some

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Speaker 1: of the Euro's resilience. Yeah, and the I m F

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Speaker 1: also saying that, well, if you think China, the US

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Speaker 1: and the EU have got a bad well, emerging markets

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Speaker 1: are going to have it even worse. Um, but you

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Speaker 1: have a by writing for another number of EM currencies.

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Speaker 1: So what's the thinking here? Well, part of it is,

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Speaker 1: again I keep repeating myself about the broader, taller taking

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Speaker 1: in this corrective phase, and that gives a lot of relief.

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Speaker 1: And when the FED stops raising interestry, it's the anxiety

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Speaker 1: around that subsiding. The volatility starts to come down in

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Speaker 1: the FX market or in other asset classes, and that

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Speaker 1: sets the stage for a number of EM currencies to

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Speaker 1: stabilize and recover. We begin to see that, you know,

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Speaker 1: I think that we still need to be a little

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Speaker 1: bit careful because there's lingering, uh, you know, concerns about

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Speaker 1: as I said, what's happening in China. Could the FED

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Speaker 1: still need to be a little bit bolder, But overall,

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Speaker 1: I think that the set is more comfortable compared to

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Speaker 1: where we were over the last you know, the last

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Speaker 1: twelve months. So I think our confidence very much residing

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Speaker 1: in certain stories in Asia, and I mean the Asian

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Speaker 1: region and also elsewhere in the emerging world such as

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Speaker 1: Latin Americas. So you talked a moment ago about the

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Speaker 1: relative weakness in the dollar. Are you concerned about the

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Speaker 1: rate of change, the rate of acceleration in that depreciation.

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Speaker 1: Does that give us insight into a level of risk

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Speaker 1: that we need to unpack? I I think that yes,

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Speaker 1: we do need to be careful here because it is

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Speaker 1: sold off very very fast, very quickly over the last

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Speaker 1: two to three months, and and when we still have

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Speaker 1: you know, the FED is not uh you know called

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Speaker 1: the end to the rate hiking cycle just yet. All

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Speaker 1: it takes is an inflation surprise, strong inflation set of

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Speaker 1: numbers coming through, and we can see that dollar squeeze

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Speaker 1: quite nastily versus many different currencies. Now that to me

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Speaker 1: is a squeeze, that would be a spike, that would

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Speaker 1: be a sustainable one. But we do have to be

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Speaker 1: mindful that those have near term uncertainties. Still exists very quickly. Uh, Paul,

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Speaker 1: do you see the fit easing in three No? Okay,

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Speaker 1: you have it, sint as always, Paul, always a pleasure.

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Speaker 1: Thank you so much for taking time to visit with

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Speaker 1: us and to join us from our studios in Hong Kong.

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Speaker 1: Paul malcol mackail, I'm sorry, is a global head of

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Speaker 1: x f X research at HSBC,