With a predicted downgrade in Q3 GDP, low expectations for Q4 after the government shutdown and ongoing budget uncertainty among others, QE tapering in December isn’t that close, says Simon Smith of FxPro.
In the interview below, Smith also sees plenty to play for towards year end, with a potential of a stronger euro. In addition, he discusses a negative deposit rate in the euro-zone, the next moves of the BOE and more.
Simon has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining FxPro in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital. He has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International. Simon holds an MSc. in Economics from the University of London and a BSc. from Brunel University.
After the stronger than expected US GDP and the strong job growth in the latest NFP report, is the Fed closer to announcing QE tapering in December?
I’m not so sure that we are lining up for taping next month. We’re likely to see a decent correction on inventories in the GDP number. Add that do the shut-down impact and we are going to fall some way short of the Q3 pace of growth in Q4. For the labour market data, you have to remember that the unemployment rate ticked up (likely shut-down related) and that even if we see a reversal, there is growing unease that the 6.5% rate is the appropriate line in the sand. Participation fell substantially in the latest numbers, at this is in part a reflection of more workers leaving the labour force. It’s not something the Fed can do much about (it’s far more a structural issue), but it has to be mindful of when reviewing policy in light of the fall in the unemployment rate. All in all, lining this up with the continued budget uncertainty, I don’t think the Fed will move in December.
The ECB fired a cannonball with the rate cut and Draghi said he has more “artillery”. Could the ECB set a negative deposit rate in 2014? Would a negative deposit rate send the euro much lower?
For sure, I think it is something that will come in time. It would (in theory) be a way of encouraging banks to lend excess liquidity. In theory, it could be seen as euro negative should banks choose to put more money overseas rather than be penalised with negative rate, but we’re in unchartered territory here so difficult to know how much this would impact in reality. Nevertheless, given the unprecedented nature of the move, I would expect it to be more euro negative that last week’s rate cut.
Do you think the BOE will change anything in its forward guidance in the upcoming inflation report?
It will remain intact, but the time by which they expect to achieve the 7.0% unemployment rate will be bought forward by at least one quarter (from middle of 2016) to reflect the improving outlook since it was introduced in August. To change the structure of the forward guidance after 3 months would be very damaging for the Bank’s reputation. This is probably in the price. If they bring it forward by two quarters or more, then that would be taken as a positive for sterling.
The Bank of Canada recently removed its hawkish bias. On the other hand, the Canadian economy isn’t doing too bad if we look at the recent jobs report. What is next for the Canadian dollar?
Of course, compared to the US, Canada emerged relatively unscathed from the global financial crisis. The labour market has continued to improve, but I don’t seen the Bank of Canada being able to front-run the Fed to any great degree because Canada is too reliant on the US economy being on a sustainable footing before tightening can be seriously contemplated. The BoC raised rates bank in 2010, from 0.25% to 1.00%, which naturally supported the CAD. I think the 1.06 level on USDCAD should hold until the year end, with the CAD appreciating towards the 1.03 level on the basis of a USD dealing with softer data and tapering not happening this year.
Can we expect markets to slow down towards year end or can this year be different due to tapering speculation or anything else?
There is always a seasonal slow-down, due to closing of books, less people being around etc., but that does not mean lower volatility. There is still plenty to play for, such as changed tapering expectations, together the fact that I think the euro is going to do pretty well for the remainder of the year, once again defying expectations for it to weaken. The real impact of the rate cut will be limited and the history of currencies with low or negative inflation and current account surpluses has been one of strength rather than weakness. As such, I don’t really buy the policy divergence story pushing EURUSD lower.
Further reading: EURUSD weekly forecast.
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