FX market update
Oliver - Marvin, last time we spoke you gave a great overview of what’s happening in FX markets. I’ve actually got some questions directly from our clients which I’d like to pose to you now.
What do we expect from central bank monetary policy for the rest of the year and what impact, if any, has Trump’s rhetoric had against the Fed?
Marvin - Ollie, we are expecting pretty aggressive, and proactive easing by the Fed this year, about 75 basis points of cuts in total. But, we don’t think this has much to do with President Trump’s slings and arrows — at the Fed, at least — Chinese imports are another issue! We can see these cuts as an insurance against falling inflation expectations, that’s certainly the way the Fed is looking at it, given the persistent undershooting of their target, and we also see it as warding off the effects of trade policy uncertainty on investment and economic activity, and the likely effects of tariffs on an economy that has already softened somewhat particularly in the industrial sector. This should lay the foundations for an extended US expansion next year as the rate cuts start to boost growth and that should support the dollar next year.
Oliver – I have to mention the B word, Brexit! Since the UK failed to agree the withdrawal agreement on 29th March, has this raised the probability of a no deal Brexit?
Marvin - Well the rhetoric of Boris Johnson, the front runner to lead the Conservative Party and succeed Theresa May as prime minister, certainly does suggest an increased probability of “no deal” (notwithstanding his more recent declarations to the contrary). But he has made clear that he is committed to leave on the new Halloween deadline, and given that after three tries there is clearly no parliamentary majority for the deal on the table, and Europe refuses to renegotiate — and it’s not even clear who you would negotiate with given the changeover in the EU Commission — it does leave “no deal” as the default and that’s the concern. But, I would say it’s still early days in the Tory selection process and campaign promises often change when confronted with reality, so for now we continue to forecast some type of deal or extension as is our base case.
Oliver – A recent survey revealed the second biggest jump in the consumer defaults since the financial crisis. Are there concerns surrounding UK consumer spending habits?
Marvin - Ollie, there are definitely concerns, particularly as the economy has slowed due to Brexit uncertainty and to a rise in “buy-to-let” mortgage standards last year. Added to that, other economies are slowing, especially the UK’s largest trading partner, Europe. That said, the UK remains at full employment and wages are showing some increases. So, while the concern is there, we are not forecasting the onset of any type of recession in the UK.
Oliver – The UK appears to be enjoying an unprecedented boom in jobs. Yet there is little evidence of this feeding into inflation, why is this?
Marvin - That’s a good question Ollie, and wouldn’t the Bank of England like to know! Actually, there are some members of the Monetary Policy Committee at the Bank of England that are advocating a rise of the bank rate because they do see wage growth and there has been some level of acceleration in the last year, though your point that the gains this cycle seem very subdued relative to past cycles is definitely true. Low wage and price inflation, even in economies without slack, is a global phenomenon and it is what appears to be driving the Fed toward easing this year, despite an economy that has historically low unemployment and still solid economic activity in our view. At Barclays we were early to identify and investigate the causes of this global problem in inflation, though we think the answer lies in competitive effects of globalisation and rapid technological innovation, the truth is we’re just not really sure and neither is anybody else. This is one of the reasons why we’ve called this phenomenon “missingflation”. But one thing is clear: central banks are taking it seriously and they are shifting their reaction functions as a result. This means lower, perhaps more uncertain paths for interest rates, and that of course makes our job forecasting foreign exchange even more difficult than usual.
Oliver – Marvin thanks so much for your time and insights today, it’s been a real pleasure talking to you.
Marvin – Thank you Ollie.
Oliver – I look forward to speaking to you again soon