Surveillance: Dollar Is Overvalued About 10%, Vamvakidis Says

speech of the week. Joining us to discuss is Thanos van vakilis, head of g T and FX Strategy, Bank of America Merrill Lynch, and he joins us out of London. Good morning to your Thanos, Good morning for the Federal Reserve. Then and chare jpow speech? What are you looking out for? What's important? Well, the FETE has been not large in policies, has been hiking this year. The message has been consistent

from power. So from this point of view, I think what will come out this week will be consistent with the normalization, but we will be looking for a more color how far the FED can go, how the balance the good data in the US we are seeing with global risks and trade tensions, and also about the side effects of the policy normalization and the tightening cycle on

the rest of the world, particularly on emerging markets. How how the balance all these risks in order to have a better understanding of the policy reaction function will be important. So thant Us was reading through some of your recent research and I was struck by the idea that you saw a little further upside left for the euro US dollar cross, and yet you also think that the dollar could strengthen more. So, where is the dollar going to

strengthen more if it's not against the era? I mean the short term, we do see the dollar appreciating further, even with respect to the euro or projects for September is one twelve, but we're not far from this level, and we have already seen a strong dollar rally since the mid April. The data are still supportive of the dollar, and at the end of the day, the fat is

still hiking. Looking, however, more beyond the next few weeks, we believe that and looking particularly into next year, we believe that we're gonna see a gradual weakending of the dollar, including with respect to the euro. Uh the impact of the US physical stimulus is likely to start weekending some time and next year, uh, the c B will stop que and they will start hiking at some point next year, before or after the summer. The market also is long.

The dollar these states is not stretched, but is long, and the dollars over valued by about ten percent. So from this point of view, we're waiting for one more leg higher to the dollar, and we'll be looking for an opportunity to buy the euro dollar deep and US. When you say the US dollars over price by ten percent, what does that mean? Any made a calculation? I mean

you can use a number of models. Usually we just use an econometic model, which will look at different determinants of exchange rates such as the current account balance rate differentials in terms of trade, and we look based on historical evidence to what extent these variables justify the level of the dollar. Or you can just use a much similar approach. You can just look at the deviation of

the trade weighted dollar from historical average. No matter what you lose, you come up with close to the estimates. For example, for euro dollar the long term, making liberty somewhere between one to one. Again, we're not that far from this level, but this is where we will expect the euro dollar to convert in the medium term to long term. So I want to take a step back here because really the drama this year has not been

in the euro dollar cross. It has been in emerging markets and what the strengthening dollar has done to developing worlds. And I want to get your perspective and how you viewed what we've seen so far. I mean, we've seen the Turkish lar lot of bed certainly in the Argentinian pace.

So but going forward, do you expect more rough spots like this, more sort of sort of air holes with emerging market currencies falling through them, or do you think that we're gonna gonna reach a more stable point there. I mean, you're absolutely right to a lot of extent. This year he has been about emerging markets. We started the year with the market being long a very stretched position.

The trade tensions, the FED hikes all have been affecting emerging markets negatively and also had local risks in different regions, in different emerging markets Argentina, Morrisson, Turkey, So all these factors have affected looking forward, I think one will have to be more selective position. He has definitely adjust. It is clean. The market is not short emerging markets, but definitely is not long anymore. One will still have to be careful on cases like a Turkey where things could

become before getting better. But I think beyond that, assuming that we are not going to a full blown trade war, emerging markets could offer opportunities in the months ahead. They are definitely a very attractive valuations and in some cases the data has been good. Hold on one second, are the specific emerging markets that look really good and like opportunities here, For instance, Korea is an interesting case assuming we don't get the trade war between China and UH

in the US. Mexico is another case where we are quite optimistic on having enough to deal UH in the months ahead before the end of of of of the year. So again, to a large extent, the emerging market trade is just waiting for more clarity on the trade tensions. If the worses avoided, then we can see emerging markets rallying. Senos Vambacatis great. I can't champ with the joinings from London. They had Jeets and Effect Strategy and Bank America Merrill Lynch.

One thing that we are going to be watching this week other than going back to school for a select group of kids, will be that Jackson Whole symposia where we're going to hear from central bankers around the world. But most importantly, probably for most people watching, we're gonna be hearing from j Powell, the head of the FED, joining US now Tim Quinlin Wells Fargo Security senior economists to talk about this. And Tim, what's your take? What are you expecting to hear today or not today Friday?

I guess I'm trying to jump ahead because it's Yeah, I guess you know. What we're trying to see here is UM you know, broad outlook for the FED and no UM, you know, influence from any perceived political pressure in one way or another. I mean the UM. I expect Powell to reaffirm that they're looking at UM an objective to maintain full and full employment and price stability, and and they're more or less on track with both

of those objectives at this point. Is there any chance as that it's going to be really exciting and that he could pull a Ben bernanke back ahead of the taper tantrum in two thousan Yeah, I mean, it wasn't just then either. I mean it was sort of like the uh, this was Bernanke's big stage to announce major inflection points and FED policy, and um, it became sort of the uh, you know, woodstock for central bankers to some extent. But UM, I don't think that you're gonna

get into those kind of fireworks this week. I expect um Powell to just sort of stay on script and and continue the forward guidance that they've been maintaining throughout the last couple of years. Sam, there are some investors out there that think we might be approaching an inflection point in monetary policy, not over rate, but perhaps with the balance sheet. How do you anticipate the balance sheet policy is going to evolve over the coming months, coming quarters.

I think that's really gonna be a tricky question for the said because when I think about that, there's there's two major things that can influence longer term rates. One is, Um, you know, we're gonna be running much bigger budget deficits over a trillion dollars by twenty That means Treasury is gonna have a lot of new issuance, which was going

to put a lot of supply out there. Now you've got the saied not only not soaking up that new supply, but potentially allowing things to mature and roll off their balance sheet. So, you know, it's the extent that that happens and the influence that that could have on the shape of the curve the FED is gonna have to be, you know, pretty pretty deliberate and careful about, you know,

how it allows this stuff to wind off. I think maybe the interesting thing to say in that context is if you think back to, you know, maybe where we were in prior cycles with the Greenspan conundrum, where you've got this problem where the FED can't raise rates again without taking short term rates above longer term rates. To an extent, the size of the balance sheet gives them a little bit of flexibility in that regard and allowing

them to shape the curve a little further out. So, Jim, I want to follow on with that, which is what is the outstanding amount of securities on the Fed's balance sheet when they're done with this runoff? And I'm looking right now at but at a balance sheet that's four point two trillion dollars, I'm wondering, are we going back down to two trillion dollars three and a half. So pre crisis we were like eight billion, which seems almost laughable.

Now there's there's no way we go back to normal. Um, you know, I I you know, to too is probably

a reasonable starting point. I mean, they've said they're gonna you know, kind of the terminal rate for FED funds in this cycle will be at around three percent, So um, you know, once they've more or less achieved that, their only real influence on policy will be the shape of the composition of the balance sheet and um, the extent that they allow treasuries or mortgage backed securities to wind off and in what ratio, And I think, um, that will be you know, one, the FED looking at its

objectives and how is it doing in terms of inflation and labor. And then too, you know, what is the shape of the yield curve and what are they what are they trying to achieve there? So I think that that will add an interesting level of complexity, will go into these FED meetings talking more about the balance sheet than we are about you know, the actual FED funds

rate itself. To what extent is this just sort of holding your finger up in the air and guessing where the balance sheet will end them where it should end. And to what extent? Is there actually a methodology for thinking about this? How do we get to two trillion two and half trillion? I mean, there's a couple of ways you can think about it. The only rational methodology that I can apply is what's the fays normal share

of the treasury market? And over time that's around fourteen or fifteen percent or so, so you know, by the time it gets back there, it'll be you know, about two and a half trillion. So that's that's one kind of dead reckoning way of doing it. Now you might think, well, how can that be if we if they've if they've gone from billion to four and a half trillion UM, it's because there was so much more issuance in this

cycle too. You know, when we had one point four trillion dollar budget deficits, treasury is issuing a lot of this stuff. So the although the said was buying a lot, but the overall share grew a lot in that time. So, um, do you have to make adjustments for that form the fact that there's been a lot more issuance. I don't know if we're gonna be running trillion dollar budget deficits going forward. Maybe maybe not. Maybe that's kind of the new speed limit for the rate of issuance. And on

that basis, UM two trillions a rational. It's really interesting that the biggest cries for to stop, for the balance sheet process to slow down, it's coming from abroad, tip, it's coming from international, it's coming from emerging market central bank governors. I don't hear much domestically. What's the domestic russianale to slow down? Well, you know, I mean when you look at who's been buying this stuff. Um, you know, the foreign central banks had a much bigger interest in

this stuff earlier in this cycle. So when you know, the sovereign debt crisis was at its high water mark back in eleven, when there's worries about China slowing down. In more recently though, um, there hasn't been as much foreign appetite for a lot of this issuance. And UM, I think that that contributes, at least to the margin to some of that. Well, I guess that to follow on with John's question, there's a question of how good

the U s economy is right now. Are we seeing a peak or are we seeing just momentum building and i'd love your since just based on the economic data that we've seen recently. Yeah, I mean, we're certainly closer to the end than we are at the beginning of the cycle, There's no doubt about that. But um, I think when the FED looks at this, they're they're not thinking so much of where we are in the economic cycle.

Of course they have to consider that, but I think they're their primary thing is to look at um inflation in the jobs market, and the job market, by any reckoning is white hot right now. And when you look at not just a low unemployment rate, but you know, quits being near all time highs UM the initial jobless claims for week moving average of that hitting levels not seen since the nineteen sixties. So um, the labor markets

certainly there. And the inflation side of things is you know, for you know, nine years in this expansion, we couldn't buy two percent inflation and we're kind of there now. So um, is it late in the cycle. Most assuredly it is. But from the Fed's perspective, it's it's mandates is it's it's firing right online with where it needs to be. Tim great to catch out with you ahead of Jackson, rewhoming. Tim mc quindon wast Fogga security scene,

mcconomist joining us right here, Blomberg Surveillance. A ton of housing data coming through, sort of bleeding through, drip feeding us through the week on the update of the U s housing sector. John, I think that the housing market has not gotten quite enough attention, especially because homebuilders as a sector are down nearly eighteen percent so far this year. And this comes as there's broad strength across the board and almost every other sector. Um So there's a big question,

you know, how healthy is the US housing market? And maybe someone can answer that. Maybe that person is Ken Simonson. He is Associated General Contractors Chief economist. He also is a survey analyst for the National Association for Business Economics. Ken,

thank you so much for being with us. I want to start with the housing market, and I was struck by the University of Michigan survey that came out last week that showed the smallest proportion of people that they talked to saying that it was a good time to buy a home since two thousand and eight. What do you make of that, Well, it's a pretty striking data point. I'm never confident though, that the confidence surveys capture what

people are actually going to do. They may say it's not a good time, but it takes a fairly small percentage of people to actually go out and buy, to move the needle on home sales. So I'm more interested in seeing what those hard data indicate about what's happened in the latest month. So what do you expect this Wednesday and this Friday. Well, again, that's a series that's quite volatile, but um, I think the trend has been pretty flat so far. Clearly people are having a hard

time find finding houses at the right price point. And then there's also a lot of reluctance among millennials in particular to commit. I know people have been saying for years, Oh, as the monials get older, they're going to do the same thing as their parents did. Uh. Surveys about intentions to buy at some point indicate that. And yet people are still waiting longer to get married, longer to have kids. They're having fewer kids than even when they're doing uh

having those kids. Many of them now are in the cities or older suburbs where UH they find the school systems have adequate choices and they're not fleeing to ever further out suburbs. So I think we're gonna see very slow growth and single family home growing home buying. What's been interesting to me is that the multi family that appeared to have been overbuilt for a while as actually showing some strength. John, do you like that millennials just

have commitment problems? What are you trying to say? I'm just saying that that's maybe that's what you try to trying to personalize the segment alright, So ken Im not going to get into commitment problems. But you have to wonder how much this has to do with sort of oh millennials these days, and how much this has to do with higher interest rates in the fact that price the prices of homes have gotten so high. And I guess I'm just wondering, we are we reaching a tipping points?

You have seen declines in a lot of major markets, and are you seeing sort of ongoing dips sort of for telling a larger and longer slowdown in the US housing market. Well, again, it's the interesting I think there was widespread assumption with the uh FED ratcheting up short term rates and that the long term rates would also move up steadily. But instead we've seen that third year and the fifteen year mortgage rates really fluctuated around pretty

moderate levels. So I don't think people are being panicked into going out and buying now before interest rates get much higher. I think people may think, yes, there is going to be a long term upward trend, but I think that may have more effect on those who have houses available to sell. They're saying, wait a minute, if I sell and want to buy another one, I'm going to be trading in a super low mortgage for one that's higher. People who haven't yet thought they're saying, I

can afford to wait a while longer. Interest rates are not shooting through the roof, all right, So Ken, I want to shift gears a little bit because, aside from wearing a housing hat, you also are one of the uh survey analysts for this National Association from Business Economic Study. And I'm wondering you were looking at tariffs right, Yes, and this was a survey of two and fifty one members of the National Association for Business Economics, the professional

organization for folks who use economics in the workplace. I guess you guys should be members too. All right, that was a good pitch. Would you find real quick that overwhelmingly they believe that terrorists are harmful to the economy, even if they may do some short term good, that uh,

they're likely to do more harm than good. Well, I shouldn't come as too much of a surprise considering the fact that right now we're seeing that across the board, and of course this morning we saw that MARIKSK, the biggest shipping company in the world, that the CEO is saying that he expects the trade the trade potential attentions having a bigger effect on the US than the rest of the world. Ken Simonson, thank you so much for

being with us. A pleasure speaking with you about the housing market and also the fact that economists think that tariffs are bad. Ken Simonson is Associated General Contractors chief economist. We've had a fewer question coming through the Bloomberg terminal. We love questions from you, guys, We love hearing from you. So just I'll go in to the Bloomberg terminal, go onto GTV go and then click well click underneath the video screen. So this is another question from inal Patel.

It says sanctions risk facing Russia have resurfaced again. And so given we know that you said you probably like Rubal longer term, what are the chances of it more sanctions hurting the economy there? Yeah, I mean, I think and that's an important question because obviously we like the fundamentals of Russia and the economic story there, but as we've seen with other countries, sanctions are now posing a

risk UM. And what's becoming concerning is that the US administration almost using it like a policy tool in order to ahead of sort of the midterm elections in November to UM, to advance their their position a little bit more UM. And if we think about some of the sanctions and tarrits that have come through with regards to to China and Turkey, every time hes are coming through, Trump's approval state ratings with his base is starting to

increase even further. So ahead of the midterm elections, there is always that risk and that chance that you do see those sanctions sanctions being broadening out to other countries UM and Russia is one of those that post is that risk, But ultimately we're sticking to the course story of the fundamental long term, medium term story with Russia. But obviously sanctions could sort of sort of disrupt that

story a little bit in the nit term. You know, if there's a you know, duopolitic exploring up again like we saw a couple of months ago, do you go to cash UM. I don't think you need to necessarily go to cash UM. I think that's a lot of people would probably think that it's the right place to go. But no, you do see volatility and markets and and ultimately, if you if you think back to sort of last year, volatility has been a lot lower than where historically we

would have expected it to be. So these types of things coming through are not unusual when it comes to how markets perform um. So it always pays to stay invested in markets. I don't think you should flood back into casha completely, but you might want to rebalance slightly and and sort of change that balance of equity exposure or put some protection strategies in place regards regards to your risk exposure. But ultimately, I don't think you necessarily

to move everything into cash. Just going into the Russia question, the big disteing Russia and a lot of other markets emerging mark It's not a lot, but but many is that it's it's an oil story, yeah, and that's a big difference between it in Turkey. I had to come back to our previous question with Crescent. If oil stays in those kinds of ranges, Russia is looking like a pretty is going to benefit from there exactly. And I

think those fundamentals are really important. Is that the global growth story, the baseline is that we should see a continuation of that, and that should help to support the oil market. We should. You know, we're looking at an average of this year sixty seven dollars dollars pervarily for the year UM and that should take you to around sort of seventy dollars for the remaining part of this year.

The DEMANDUS supply balance is still very tight, and that is supportive of oil, and that, to your point, is very good for Russias and the economy. We know. Thank you so much for joining us for the Arab Hotel there of dpmorgan. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, so Cloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio