The European Central Bank is gearing up for a monetary policy announcement tomorrow. Based on the following table, which shows broad based weakness in the EZ economy since the May meeting, they need to ease. Whether it happens now or in July is still an open question, but the central bank can’t sit by idly and do nothing for much longer.
I was on CNBC Asia last week talking about how proactive the ECB will be in light of Europe’s sovereign debt troubles. Sorry for the late post!
I was on CNBC Asia this morning talking about the potential for a deep market correction over the next few months and the degree of Renminbi undervaluation.
Renminbi Undervaluation
I was on Bloomberg yesterday talking about my outlook for the Yuan and EUR. Here’s the video and a list of the Q they sent me in advance plus my quick notes/responses! Some good ones on Yuan convertibility
1. Outlook for the yuan and the impact of slower growth in China on the FX markets (It would be great if You can comment on China’s Trade / growth momentum in relation to FX as we have Trade figures tomorrow and GDP figures on Friday). Also what’s your outlook for the Yuan?
I am long term bullish Yuan and its one of my favorite currencies on a one year outlook basis. Unfortunately the currency has not performed well lately due to the prospect of slower growth. Given the outcome of the latest PBoC meeting and the slowdown that we will likely see in this week’s GDP numbers, the market will continue to discount more policy fine tuning from the PBoC. As a result, I believe there is scope for some further CNY weakness before strength.
Also when do you think Yuan will become fully convertible?
We are looking at 3 to 6 years. China has accelerated the use of Yuan internationally through bilateral swap agreements. There is a lot of talk that this will happen in the year 2015 but this could be a bit ambitious. Either way though, China should achieve full convertible by 2020.
2. Outlook for the Euro. Recently we had Spain aution that didn’t go that well. There are renewed concerned that debt crisis will spread. Is the worst over you think? What’s your take on the Euro?
NO! The worst is yet to come. This was terrible news for Spain. I think the European sovereign debt crisis will exacerbate / escalate, necessitating another LTRO from the ECB this year.
3. BOJ concludes policy meeting tomorrow. There has been some talk that BOJ may add stimulus some time this month to help the economy and ease the strengthening yen. What’s your take on BOJ / yen?
No stimulus this week. BoJ still assessing impact of asset purchase expansion and inflation goal.
4. The latest U.S. employment figures missed estimates. Economists have been concerned about the pace of the U.S. recovery. What’s are your views on that and the dollar?
The US payroll figures validate the Fed’s concerns about the sustainability of the labor market recovery and renews concerns of QE3. I can speak in detail about why I DO NOT believe that QE3 will be implemented but that does not preclude investors from being on QE3 watch. The U.S. recovery has hit a road bump but at the end of the day, the US economy is still recovering and will contribute positively to global growth. As long as asset markets don’t plunge, the Fed won’t resort to QE3, an option that will be reserved for a more desperate time in the US economy. As for the dollar, I think the dollar rally last week was misplaced. The FOMC minutes was from the March 13th monetary policy meeting. Bernanke made dovish comments well after that. The weight should therefore be placed on Bernanke’s comments and not the FOMC minutes.
5. What are your top currencies now? Also what’s your take on commods currencies, the likes of Aussie, kiwi?
Fav is long CAD and short EUR. I am bearish AUD, neutral NZD.
Since this week’s LTRO operation, the EUR/USD has fallen 3 straight trading days by as much 280 pips. Based on this price action, it looks like the pair is on its way to “mirroring” the post December LTRO move. It wouldn’t take much for this to occur – all the EUR/USD needs to do is fall another 180 pips which would STILL put it above the psychologically significant 1.30 level. Back in December, the selloff in the EUR/USD felt so much deeper because it triggered a break below 1.30 and a move to an 18 month low. I’m betting on it happening again. What about you?
