Thursday, September 19, 2013
INTERVIEW: U.S. Expert Sees Stronger Dlr After FOMC
TOKYO(Nikkei)--Investors are anxiously awaiting the results of the Federal Open Market Committee meeting, which convenes Sept. 18 in the U.S. When and how quickly the Federal Reserve Board starts to taper its massive monetary easing will have a significant impact on markets.
- David Woo
David Woo, Bank of America Merrill Lynch's head of global rates and currencies research, recently told the Nikkei to expect a stronger dollar and weaker yen.
Excerpts from the interview follow.
Q: Will the U.S. dollar strengthen after the FOMC meeting?
A: I honestly think it will. The importance of this meeting goes beyond what they are actually going to do in terms of tapering or the size of it. They are going to be setting out their forecast for 2016. It's reasonable to think that they're going to actually have a pretty decent forecast for what is in store for the economy in 2016 -- much lower unemployment rate, high GDP growth and so on.
If things are going to be that good through 2016, then the Fed is going to be hiking rates more aggressively in 2015 and 2016. That's going to be a very important factor as far as what the market will be looking for. If they begin to taper and the economy can still stand after three months, I think confidence in the U.S. will only grow and that will be very dollar bullish.
Q: What is your recommendation on currency investment strategy?
A: We see the dollar on the verge of a sustainable rally. The end-2014 forecast for the dollar/yen is 108. In the short term, the dollar is going to be a function of U.S. monetary policy outlook.
The reason why higher U.S. bond yields have not so far translated into a stronger U.S. dollar is because it has become riskier to own U.S. bonds since the volatility of U.S. treasury has gone up so much. For the dollar to strengthen, we need to see interest volatility coming down. I think it will happen once the Fed begins to taper.
Q: Why do you think U.S. dollar will appreciate further?
A: Since 2003, dollar has been going down in a straight line. At this point on a trade-weighted basis, the dollar is at a nearly forty-year low. The main reason behind the view that the dollar could be appreciating is an increasing share of U.S. domestic spending is now benefiting U.S. produced goods and services. This is the first time in 20 years that spending on U.S.-produced goods and services is growing faster than imports.
More American spending is benefiting U.S. producers, creating jobs in the U.S. rather than in Japan, China, Europe or somewhere else. This is going to reduce U.S. unemployment rate, and at the same time is going to reduce the U.S. current account deficit. That's a very favorable combination for the U.S. dollar.
Q: Lawrence Summers is no longer in the running for chairman of the Fed. Will that news have a long-term impact on the markets?
A: What really matters is what is going to happen after the FOMC. If anything, I would argue that Summers' withdrawal makes it more likely that the FOMC on Sept. 18th will taper. This whole thing has driven down bond yields and driven up the stock market, and that might give the Fed an extra reason to taper.
Q: Japanese Prime Minister Shinzo Abe is expected to decide next month on the consumption tax hike. How will that affect the markets?
A: Its implications for the foreign exchange market are more limited than the impact on the stock market.
There are four different scenarios: raise the consumption tax, phase in the implementation, raise the tax but also introduce corporate rate tax cuts, or simply delay. If they were to raise the consumption tax, that would clearly be bullish for the dollar/yen. That's because it represents fiscal tightening, and as BOJ governor Kuroda has made it very clear that he would offset that by printing more money, it will help lower real interest rates in Japan, which should be negative for the yen. On the other hand, if they raise the consumption tax but cut the corporate tax rate at the same time, I do not know to what extent that is going to call on the BOJ to ease monetary policy further. The direct impact on debt sustainability will be very small. That course of action is not that different from basically the government not doing anything at all.
-- Interviewed By Staff Writer Hisao Kodachi