Borthwick Sees Great Dollar Weakness In Next Year Or So (Audio)

That means that yen got a lot stronger, making the job much much harder for Prime Minister and the Make of Japan as they try to stimulate and boost Japan's economy. Connecting all the dots for us now is Douglas Borthwick. Doug is managing director and head of FFX at Chapter Lane and Co. Here in New York City. Welcome Doug, Thank you very much. So, first of all, the fact that more Fed officials now six out of seventeen, say only one rate increase this year compared with four rate

hikes projected by the majority in December. Did that surprise you? And what does it mean for the Fed? Does it mean for the dollar going ahead? It didn't surprise me at all. If if you remember we spoke actually the end of December, and then we talked about how they wanted four more rate rises by the end of the year and how shocked I was that that was the case, and I think they had to come back to one or two. And I think that what we're seeing now is that one or two is coming back into focus.

You know. I think that at the end of December, the Fed was just extremely optimistic, and yet their message when they raised rates seemed to be rather defensive rather than offensive. And I think that what they're doing now is they're catching up to the market and having that realization that, you know what, the economy isn't quite as

strong as as they've expected. And I think that the the employment numbers that we saw obviously last week were terrible and that just made them obviously take a pause and decided that maybe we should put it off. I think that thinking that July will be the first rate rise, I think is are the second rate rise is obviously

a little bit ahead of itself as well. So I think they were going to see maybe and you were talking in September now and we when we look at when they be raising rates, if they do, I think it's been a very big change in the market now since the last twenty and G seven meetings in that it seems that center banks have run their course in terms of CHEWI and seeing that as as the medicine

for the weakness in the economies. And today I think that the FED really talked about how there is a difference between monitoring fiscal policy and what can be used

for which. But also you saw the b O J last night commit or at least you had the chairman of Chairwoman of the l DTUH Tom only in Adu, who said the structural reforms and growth strategy is now much more important than que And I think that that's really what we're looking at is globally the center banks are more reticent about having their balance sheets rise considerably, and maybe their pointing neither their congresses or to the diet and saying, you know, maybe it's your turn to act,

Mr Borthwick. Before we turn to September, we've got to pass through June. What do you think the voters in the United Kingdom will do and what do you think the repercussions will be. Well, that's the multibillion dollar question. I think that multi billion pound questions as well. Whatever you're trading it in that reality is we're trading at one forty two right now. That's you know, dollars to sterling.

I think that if if they were to remain in um in in in the EU, you'll probably see a rally up to the round the one fifty level and stuff, but a five move. If they decide to exit, then we're talking about going down to maybe one thirties, which is around in eight percent move or twelve big figures. I think that this is a truly binary event, and we have very few binary events in the FX market.

But by binary, I mean it really is a fifty fifty bet here and if you have a position going into it, you're either very right or you're very wrong. And I think that there's a lot of complacency in the market, namely because as you look back in the past, and I think that the Scottish referendum maybe is a

good example here. In the Scottish referendum, it was around that fifty fifty level, but then when it actually came down to people making the decision on how they were going to vote, there was there were a lot more it'd rather vote with the out as quoted, with the way things were as opposed to making a change, and I think that that's really what the remain folks are relying on, is that people don't want to take the

change and change is risky and so let's remain. However, I think one of the major points are that the big turnarounds was that the Sun newspaper, which really is a voice of the people in the UK, came out a couple of days ago and said, you know, it's time for exit. I think that now the exit, you see the exit polls ticking up, tacking up. Now, the exit polls seemed to be getting ahead of themselves as compared to the the betting numbers and the betting polls

which are still pointing towards them remaining. And this really makes it a very very interesting play. I think that there will be few people sleeping in the foreign exchange world on NAP. I can only agree with you, Doug. And of course are Bloomberg news stories out of London covering the surveys and the polls point out that there's been lots of times a misque from the poll to the vote, because when the undecided is getting the booth, they are the ones who tipped the balance, But so

so what do you so look out ahead? Is the is the Brexit vote so potentially destabilizing to Europe, to the euro area that you really can't tell us today what your call is for the dollar and the euro it's and even the yen until you know how that vote goes, or you say you'll get through it. You'll have a big reaction for a week at the world won't end and the currency trades, the currency trends continue well if there's certainly whatever happens with the sterling vote.

When you look at the ripples, the biggest ripple officer is gonna be where the stone drops, which is going to be how sterling trades versus all other currencies, a sterling yen, euro against the sterling, sterling against the dollar. After that, as you look towards dollar yen, you probably see because people will sell sterling and buy in the dollar and feel pressure on the downside. If the UK was to exit with the euros sterling, you'd probably see

people buying euros and selling sterling. If the UK was to vote to exit, and so you're sterling would rally. These sorts of moves would really be over the course of a couple of weeks, because remember, if they decided to exit, they still have to plan how they would exit, and so the numbers aren't really there or the data isn't there, and and it's not something that happens overnight. It's sudden that happens over the next number of years.

And so I think you get you get this knee jerk reaction and then the markets will calm down somewhat. I think that there is a huge trend in place right now where you see yen strength and euro strength and I and and dollar weakness. And I've been saying this since December and then I believe that that's because you're seeing some central banks or reserve managers in the world start to diversify out of their overweight position in

dollars and into the end and into the euro. If you'll notice, you'll see the ten year paper now in Europe and in Japan is now negative. In the US it's still US is now one of the high yowlders in the ten year market. And I do believe that there is there is an interest, primarily out of the largest Asian reserve managers to right now sell a dollar by euros and by yen, and I think it's because instead of monitoring their currency against the dollar, the Chinese

specifically are now monitoring their currency verse the basket. If the UK voters decided to leave the European Union, will there be other countries to hold similar referendums. Well, remember it's not this isn't a vote about the UK leaving the Euro per se. This is then relieving the trade zone or the European Union. So there could be a discussion of that. But I think that if you're a member of the euro the arts of you leaving the

EU are considerably lower than the UK. And the UK really is a specific example and that it doesn't share the euro currency, but it is part of the euro Union,

and so for for trade reasons it's rather important. The knock on effect or the domino effect from this is if the UK is to vote to leave the Euro the euro Zone, you'll probably find Scotland then calling for a further referendum because around six Scottish voters would like to remain part of the European Union, and it's been mentioned a number of times that should the English essentially vote to move away, then Scotland may vote again to move away from England, and so I think that's important.

But then as you see people talk about independence and you see referendums, then people worry about what could happen in Canada because they're spoken quebective would also like to have independence, What could happen in the Basque areas, what could happen? And there's lots of different zones in Europe as well. There's people that think about, you know what, we'd like to be independent and have our own country,

and that creates destabilization and obviously volatility. I just want to give me a wild forecast, or are not so wild? If the vote is to leave, how low does the pound go, where does the dollar go, where does young go? If they were to vote to leave. I think you probably see sterling drop off too. As I've said, right around the one thirty level. I think I don't think you're going to see it drop much more than that, and that's around an eight percent move lower that could

happen rather quickly. Now, obviously central banks are going to step in and talk about liquidity. You'll probably see that stabilize somewhat. But I do think over time you're going to see great dollar weakness over the next year or so. Thank you very much for joining US Douglas Board quick as managing director the head OFFX at Chapter Laine and Company. Right now, the British pounds sterling at one forty two twelve,

in the euro at one twelve sixty four. You're listening to taking Stock on Blueberg Radio.