Surveillance: Relative Dollar Strength in 2019, Barth Says

joins me here in the studio. Don, maybe you could explain the relationship between what we did or didn't learn from the Federal Reserve and the stock market and bond market reaction this week. Yeah. Sure, Well, it's good to be here. So let me say a couple of things to start out. First, the FED was trying, I really do believe that with the statement and what came out in the press conference, they were trying to thread the needle to say the US economy, when we look at

things like the labor market is in good shape. So if you look at the unemployment rate or jobless claims or some of those data series, that part of the economy is doing quite well. What I think was Missing from the FED statement was some mention of the interest rate sensitive sectors that included things like housing. I thought it would have been relatively easy to say something like housing data was mixed. If you didn't want to say week, you could have just acknowledged some of the mixed data

they're including some of the survey data. Also, there was a note that inflation expectations were a little changed, and that's hard to square with what you're seeing in some of the commodity space, especially the big drop in oil. So maybe that's going to be changed in future statements. But these are things that the stock market's going to pick up on to say, hey, maybe there's a disconnect with what I thought could come out of this statement.

What the Fed's view of what's going on is how it differs from my view, and I think that's what generated some of the market reaction. All Right, well, don just to sort of follow along with that, because it's not just a domestic situation, and from Guy Johnson's perspective in London, is the Federal Reserve now the central bank to the world. So they will never say that, and I think they respect the idea that there are a

lot of differences in different parts of the world. But what we do see is a big reaction when the balance sheet comments came up, and when share Powell said that the balance sheet was declining on this autopilot type of trajectory. I do think that mattered to global investors. I do think that started off some of the serious risk off moves, and I think that was partly the global situation that came into play. Good Morning Guy in London. Um don has has the President done permanent damage to

the relationship between the White House and the FED? I think that's a little premature. I do think some of the techniques here, in terms of how it's come out publicly our novel, I think this is a bit different than we might have seen in other administrations. But I think it's hard to say that this has never happened before, that we've never seen a politician interested in what the FED is doing. Certainly this is being conveyed in a unique way. But if there's permanent damage, I don't think

it's very large. If the President were to try and remove the FED chair, would that cause permanent damage? So I think that would rise to a different standard. You can remove a FED chair for clause, it's really challenging to think of another way that that could be done.

And so again, barring something out there for cause, which I think is something that would be really strange, that would start to rise to the standard of more permanent damages, don just a little bit more on the connection between the Federal Reserve and what happens in markets. You get a call from a client that says, I don't understand how we can get a one thousand point move in the Dow Jones Industrial Average more than one hundred point

move in the SMP five hundred. I received a text message yesterday from a money manager saying President Donald Trump had not tweeted during the day. He was obviously on his route to Iraq. Can you draw any conclusions that if we were to have none of this new messaging that you just described from either the Fed or the President, that we would see a less volatile market. We might

see a less volatile market for a while. But the information that's coming out, whether it's there's a concern at the FED, whether it's there's a concern with how the trade situation is going, there's a concern with what's going on in China's local economy, there's a big drop in oil prices. Those I think are the fundamental drivers of some of this risk off trade. So maybe you could change where the volatility enters the system. You could change

how that's going to express itself. But I wouldn't say we want to complete blackout. Is the market being overly pessimistic about the U S economy? Like I look at the U. S. Consumer, and it's always amazing to look at the consumer kind of from afar. The U. S consumer seems to still be firing on all cylinders. I think that's right, And so the challenge is the consumer is still the bulk of the economy. There are good supports there and that's the labor market story coming through.

So the consumer should be a support. In twenty nineteen, the challenge is going to be if the economy growth rate slows, it's probably going to come from the investment side rather than the consumption side. And so the pathway forward to a long cycle to a sustainable economic expansion is you see investment. You see the capital spending that gets you productivity. That productivity pays for some of the higher wage games that are coming through at full employment.

So it's capex to productivity too wages that gets you the sustainable cycle. So that's where I think the challenges. It isn't so much that the economy is in trouble right now, but looking forward, we'd like to see more on the I part of the C plus I plus G equation to make the sustainable economic argument. And do you do you have faith in the ability of the

FED to communicate how it's working through this process. The communication over the last few months has been a little hit and miss, and I'm just wondering whether or not, kind of to circle back to where we sort of started, whether or not the FED needs to up the game here and find it find a better way of communicating. I do think we could get some clarity on a couple key items. What do they think of housing? What do they think of inflation expectations in a world where

oil prices have declined? Do they really think the balance sheet is on autopilot indefinitely? Could that change? If we can answer some of those questions, I think FED communication would be a lot better. What is the most undervalued asset right now? Don Well, when we look at US equities, you're pricing in a good chunk of a recession. When you're looking at some of the global equities, you're pricing

in a good chance of a downturn. So if you get a FED pause, if you get a trade deal with China in the US, if you get stimulus in the local Chinese economy, if you get stability in oil prices, and that downturn, that recession does not happen. I do think there's a lot of value there, value in equities global as well as US equities. Yes, trickier there, but yes, all right, thanks very much for being with us. Much appreciated. Don ris Miller is the head of economic research at

Strategious Research. He is their chief economist. Talking about the future and the potential for gains in equities, Let's talk a little about what impact the trade talks are likely to have on the agricultural commodity complex. In talks are going to restart, we understand at a relatively low level on January the seventh. So how closely will the agricultural complex be watching what happens. Let's find out now. Kona huck is E. D and F Man's head of commodity

research and joins us in our London studio. Good morning. So let's talk a bit about what the trade story is going to mean for for your world in en Is it going to be the kind of the dominant theme. Is the trade story going to set the narrative? Yes, in the sense at least for the sentiment, because it's

had a massive negative bearing on the market. Um. The fact that the US is not able to shift its massive crops this year because China is not buying mixed on the on the back of these tariffs has meant that the U s docks are really really heavy. Um. And ultimately what happens in the US has a massive underpinning on the Chicago futures markets because that's what sets

a down there. So the US supplied amount of balances are really key here and um, Ultimately, the US supplied amound bounces will only start shifting if they're able to start exporting a lot more of their excessive volumes of soybeans, corn, and wheat, none of which have happened this year, all of which has huge potential the following year if they're able to come to some kind of deal. Okay, so kind of let's talk about risk. I'm trying to figure out how if I'm a trader. Am I making money

in the risk sounds quite asymmetric. There's a lot of negative news by the sounds of things already priced into the market, into into the various crops. Is the kind of is the easier trade there for to look for the upside? Is that kind of what we're looking at here? Is all the negative news priced in? Am I going to get a pop? Not necessarily? The reason being is UM. Although the US farmers will probably look at this year's dismal price action and think about reducing their planted acres

for next year. UM. That might sound good for US supply demand balances UM. But on the world market spectrum, you have a situation where Brazilian and Argentinian crops are likely to become massive. In fact, we're talking about a record Brazilian crop. And Brazil, if you remember, have been the biggest beneficiaries of this trade trade tariff dispute because they have been the beneficiaries of massive amounts of Chinese buying. So they're gonna they're planting like crazy. They're going to

have a record crop. It's an anne your year, which actually helps some of the the soil moisture levels there so even if the US as its part in terms of reduction reducing production South America could more than offset that corner. Are we entering a new commodity cycle or are we already in it? No, We're already in it. Um I think if we're looking at commodities as an

asset class, generally, I think key will be the U. S. Dollar. Obviously, two thousand and eighteen was all about a strong U. S dollar, at least the second half was, and that massively um led to a sell off in commodities, whether it's grains or soft or metals or a crude all

it is so massively important how the dollar trades. And I think if two thousand nineteen brings a peak dollar story on the back of you know, slow down in the U. S. Economy or FED reducing the amount of times it hikes rates, and any resulting reduction in the in the US dollar strength will support commodities, so fundamental decide, I think you know that that is something I would look at them on more positive lighting the fact that the dollar could start to um softened by a second

half of two thousand nineteen and that would ultimately help commodities AGGS included. Is there a specific commodity that you believe is the most over sold right now? Um. One commodity that I followed closely as sugar, and that has fallen massively on the back of two years of very big surpluses. It's also suffered on the back of a

very weak Brazilian real. Now two thousand nineteen should see the market move into a deficit number one and number two the Brazilian real on the back of the election of both Sonaro in Brazil could start bringing some positive influence into the Brazilian real, and so both of those factors could help sugar prices recover quite nicely in two thousand nineteen, but not necessarily the first half the second half. Just very briefly, Technology is playing an increasingly large hole

in this sector. How how easy is it to understand how that's going to affect pricing going forward. You look at the big car girls and all the sort of these companies. They are increasingly focusing on the technology aspects of farming, and this is kind of an area it's right for this right for disruption. Yeah, no, absolutely, Um, the ways in which we'll actually you know, if you look about if you if you think about why agricultural commodities have done so badly price wise in the last

five years. We've had surpluses year after year. One massive reason is because agriculture has spent a huge amount of money in developing seeds the kind of drought resistance seeds, flood resistant, pastris resistant. And so despite all of this, you've you've seen record deals. Been great to see you. Thank you very much indeed for coming to see us both on Bloomberg Television and on Bloomberg Radio. Kind of hack E D and F Man's head of commodity research.

So what do we make of the price action over the last couple of days, massive rally in US stocks yesterday today, fading. What lessons can we learn from all of this? Well, let's find out. Marvin Bath is the head of FFX and EM macro strategy research at Barclay's and joins us now on the line. Marvin, what do you make of the price action? Well, I think it's

a typical holiday liquidity, right, Um. So you combine that with some of all a toy from US policymakers in terms of the risk that people had felt with said tampering, and that seemed to be evistrated yesterday by the comments from Haszard as well as Secretary Manu nu Chin and UH. Today we go back to well, people are still worried

about earnings going forward. Does that tell us anything about how we're going to make money in twenty nineteen or is this just a kind of of idiosyncrassic I would I would definitely avoid in extrapolating this into the new year. My guess is that you will see some of it in the first couple of weeks of of the new year. This is the typical pattern people do extrapolate patterns UH forward UH, and we roughly around the second or third week of January we get some sort of major reversal.

So look, the underlying fundamentals here are still quite good. The U S economy is tracking about three in the fourth quarter. It looks like the fundamentals are quite good for the year ahead. The reactions we've seen so far seem to be a bit over the top end our view. Marvin Barth, you and your team a roup chatter Ge and Hamish Pepper. You've done a great job putting together

the FFX and Emerging Market Macro Strategy Forecast update. Tell Us does it describe dollar strength continue wing in Yeah, so we are looking for relative dollar strength. I mean if you look at it in in fact, it's mostly range trading versus the G ten, but continue strength versus emerging markets. I think relative to where I understand consensus to be. That does put us at the upper end spectrum for dollar strength. But again this comes back to where do we see weakness in the world. It's in

the rest of the world, not in the US. The US is actually doing quite well despite the sell off in US equity markets, uh, and the underlying fundamentals are strong, so you're going to get a continued carry divergence. The reason why we have that rough flat profile versus G ten, however, is the dollar does look um pretty excessively valued at these these levels um and so it's a balance between carry on one side and valuation on the other that

keeps you in a Raine trade. You've got to help guide and tell him whether he should be converting all of his pounds sterling into US dollars. Now, what happens, and that happens if we don't get a Brexit deal, do we still trade around one the pounds sterling against the dollar now, I think if if if we failed to get a deal, we would see a significant self in sterling. Now a lot of that's increasingly in the

price before increasingly expecting that. What I think is important here is that once you get to about one twenty, that's that's our our our view, you are going to see a lot of long term buyers coming because at the end of the day, this is still an economy of the UK that has a highly educated workforce, lots of technical skills, top universities, um, a tremendous amount of value in it, and you've got sterling trading near fifty

year lows on a real trade weighted basis. So as we get down to those levels, you're gonna see a lot of long term buyers come in to scoop the that up. So, yeah, could we trade below one twenty on an inter day basis, maybe even for a couple of days, sure, But will we sustainable of that? I think that's highly unlikely. Well, do you really want to

get directional? This is like the volatility in the pound has been eyewatering, and I appreciate that we've been going down for a very long period of time, but getting directional the pound seems like it seems like a difficult thing to do right now. Well, I think I think you've got it right on there, guy. This is one of the reasons why we've avoided putting out trade recommendations

in Sterling right now. Um, I don't think that it makes a lot of sense given the amount of alatility that you have in there, and that's on top of all the other volatility in markets. But I would say that, yeah, if if you do get down towards one, that's just such a good value that you should be coming in to buy there. Let's take it back to the States. Um, has President Trump done lasting damage to the relationship with

the FED? I don't think so. I mean, I think people get a little bit exercised with these things, in part because as President Trump does cause such a vicial reaction in many people, um, but also because memories are short. I mean, there was no more institutional president, uh than the late President George H. W. Bush who just passed passed away. And let's recall that back in he too decides to FED for hiking raids, right. Um, so uh, he he was. He was pretty aggressive in talking about

HUM president or chair chairman Greenspan at the time. Look, I think that President Trump made a mistake. I think that he and his advisors have learned in the last couple of days that that is a mistake to undermine people's confidence in the US institutions. That's the whole reason why people invest in the US, because the institutions are stronger than anywhere else. Um And uh, my guess is they'll take this this this lesson home. Marvin. Are many

people driving all across the United States. They're interested in things such as gasoline prices. Tell us about the US dollar versus commodity currencies. The Australian dollar has dropped about ten percent in value against the green back, and if you take a look at the Canadian dollar, the looney down seven and a half percent year today against the

US dollar. Yeah. Well, this is something that uh, um, my colleagues Hamish Pepper and Nick s Aropolis wrote about a year or two ago about the effects of Dutch disease um. Uh in terms of we saw this massive commodity supercycle in the last decade. Um. You saw a tremendous expansion of these economies over this over that period, and now you're seeing the downside effects of this, and this is one of the reasons why people keep pushing back their expectations for the RB eight uh to hike

um uh. You know, the Bank of Canada is hiking, but only because it's a atch, you know. Can This attached to the strongest economy in the world right now, the US, but even there people have tempered their expectations. All of these things are associated with a UM long term structural Dutch disease issue that they had overvalued currencies during a commodity boom and they're starting to see the after effects of that. Marvin, is there an emerging market

currency that, in your mind is currently undervalued against the dollar? Yeah, well, I think that, um some of the East Asian currencies are are are looking more interesting at this point um uh. You know, especially if we look at um krean Wan, Thailand dollar. These are all these are all currencies um that are well positioned uh um relative to others in terms of their their balance sheet profiles. Unfortunately, they are really uh exposed to um trade issues more so than others.

UM to the extent that does have been priced in. I think there's some value there if you want to get uh and this gets the guys directional point in volatility. If you want to uh get a lot more hairy, you could go for the Turkish laera. It does look like it's adjusted quite a bit um, but given the underlying institutional issues there, you're in for a volatile ride if you want to pick up that. Kerry, thanks very much for being with us. As always, Marvin Barth of Barclays.

He is the head of X and Emerging Market macro Strategy Research, calling for a continued strength a US dollar relative to those G ten currencies. We're going to talk a little bit about currencies. We've got Mark McCormick, t D Securities, North American, head of f X Strategy. Mark, always a pleasure. Thanks for being with us. We're in the Bloomberg Interactor broker's studios. You're here to tell us what is going to happen with the US dollar in is it going to maintain its strength against its G

ten trading partners? Sure? Thanks for having me so that. I guess the one thing I'd like to highlight on that is that we think that the strength is the strength of dollar is going to reverse next year. So um, I think the way you have to kind of think about, is there's a there's a couple of different dollars in play.

You've got your emerging market US dollar basket, you've got a dollar block ausy Kiwi cat dollar dollar basket, and then you also have the reserve currencies like the euro, Sterling, Swiss, Yen.

So our biggest conviction view for next year is those reserve currencies start to strengthen again, and it's partly reversal of the what we've been calling the Maga teme where make America great again as a kind of momentum trade in US assets, whether it be corporate bonds, equities, US dollar is going to give way back towards a little bit more of what we'd call kind of a global reflation trade, where the rest of the world central banks can start to tighten policy a little bit more ketch

back up with the FED and also see undervalued currencies, particularly in Europe in Asia start to outperform again. Well mark that reflation trade. I mean, that's that's sort of the fear that a lot of folks in the market, particularly and equities have u that you know, it could sort of end up being kind of the self fulfilling prophecy where we end up sort of where the market sort of tips the economy into recession rather than the FED itself. And I wonder how much of a risk

is that right now. Yeah, it's a great point, I think. I think the way you want to think about it is is an element of how are the US assets performing right now as a signal for where the US economy should be maybe next year, maybe even you know, we go out to two thousand twenty versus how does the rest of the world as sets performing at this point as well? So I think a nice way to think about it is that one of the main drivers for the dollars throughout this year really wasn't interest rates.

It wasn't that the US had a higher yield than the rest of the world that are fed was tightening. It really came through the equity market for formants in the US versus the rest of the world. M s c I ratio benchmark basically, which peaked around the mid terms, was showing that rest of world capital was coming back into the United States, and largely I think what it was is a repatriation of American investors pulling money out of Europe, pulling money out of emerging markets, pulling money

out of out of Asia. But I think the story for next year kind of focuses on the rest of the world. Growth has kind of gone through the major pain that we saw through the parts of this year. U S data surprises outperformed most major economies for the better part of two thousand and eighteen. Equity prices again, that story has already been kind of starting to reverse already.

But I think the reflation trade is one where the markets expecting a global recession, and I would say our FX views are kind of predicated on the fact that it's really more of a correction of US assets um, particularly off the you know, the ebbing of the fiscal support, the ebbing of the repatriation of capital flows, which I think was a big underappreciated factor that drove US assets this year, and all of that is a rotation of US investment and other investors which have large savings back

into higher yielding assets outside of the US, which is, you don't need a re acceleration of global growth, but you just don't need to see the downside has been priced into the rest of the world throughout two thousand eighteen, and I think That's where the upside surprice comes is that the rest of the world looks okay and US markets correct at a much faster pace, which is what we've seen since the mid terms. Well, market looks as

though they're correcting in today's trade. Taking a look at stocks right now, the Dow Jones industrial leverage lower by more than three hundred points, SMP five hundred down, twenty nine, NASDAC falling one point three percent, It's lower by eight five If this continues, what does that do to the dollar? Yeah, it's It's another good point too, because I think what's very interesting is when you think about kind of the

performance of broad effects this year. Emerging markets where the big pain trade throughout two thousand eighteen, and you could see that they suffered going into the summer. But since US assets have been correcting since since around the mid terms or we're markets have been okay. So the beta of emerging market currencies or even emerging market equities to US equities has been ebbing um and the currencies that

should perform well are actually starting to perform well. Currencies like the end, and what's interesting is that the end has not been correlated with emerging markets, and when there's a lot of pain going on in emerging markets, particularly in the summer, dollar yen was moving higher. But now what we're starting to see is US assets are correcting. I think a big element here is what I think another underappreciated fact is that dollar yen is not really

trading off of interest rate differentials per se. It was trading off of the fact that the Japanese have one of the world's largest current account surpluses. They are a net global saver, and basically they were pushing a lot of unhedged capital into the United States for the bulk of two thousand and eighteen. And I think what you're seeing now is that U s assets are correcting and Japanese investors are now repatriating those flows. You know, they

invested in things that were unhedged. They were very short term their money market like securities and even corporate bonds and some equity plays. And now the US as are are correcting much faster than the rest of the world. Japanese investors are pulling their money home. But at the exact same time, you're not seeing emerging markets roll over.

At emerging markets, currencies are actually performing relatively well, so I think this fits with that thesis that it's really kind of is this a I guess the global reflation trade not the same flavor that it was in two thousand seventeen, but it's it's kind of the maga make American assets great again, is kind of underperforming relative to

the rest of the world. And I think that's the the element of where you go into two thousand nineteen where the US dollar was going to continue to underperform on a broader basis, but it will depend on those different baskets we were talking about, like dollar block currencies Australia, New Zealand and Canada. I think they're all set to continue to underperform, largely because of the end of easy money, which is which is another major another major theme in

in FX markets. You made a good point about the current account over in Japan, and I mean, the part of the whole goal of this trade war or that we've sort of found ourselves in I guess ostensibly was the sort of address the current account deficit that we have. And I wonder do you see any real hope for for US making any sort of dent in that on the U S side, and that could potentially give a little bit more left to the dollar. I don't think so. I think the problem is is that the rhetoric versus

the actual economic policies that are put in place. Are the policies that are put in action are ones that

are designed to make the current account deficit worse. And so whether we talk about the different values of currencies or trying to eliminate the trade gaps across different countries, you know, there's a there's a function here that the US is the reserve currency and having the reserve currency and essentially running a current account deficit and essentially having if you think about where the twin depths, it's going to be in two thousands twenty, it's gonna be close

to nine percent of GDP. So the budget deficit plus the current account means that the US is going to have a ton of funding requirements coming through over the next two years. And now you've seen that the growth impulse that comes along with the fiscal stimulus on a forward looking basis is already largely priced in. So the the concept of kind of introducing fiscal stimulus at the late cycle part of where the U S business cycles at.

I think comes to the detriment where this is actually going to make only make the current account that you know, the accounting of the budget plus the current account is what's going to make it very challenging for the U. S. Dollar. Our guest is Mark McCormick, TV Securities, North American head of f X Strategy, Mark McCormick. Who or what actually moves for X markets? That's a great question. I think there's a lot of different actors that kind of move it.

They all have different um incentives for what they want to try to do. So you have major corporations, you have major retail investors. You also have major institutional accounts, and then you've got you know, leverage players like hedge funds. So you kind of have all these different players, some of them being headtors, some of them just having business um production process they have to work through different accounting flows. And then you also have people who who want to

try to make money in affects. So it's kind of a combination of all those people. Now, do you see that the that the corporate borrower and the corporate player in the FX market, do they react to these day by day changes in forex relationships? They don't. They're the really big ones, the big multinationals are tuned in UM, so they're they're trying to make sense of a lot of this stuff that comes through on a day to

day basis, especially the geopolitics. UM. They're tuned into big data releases and they're tuned into kind of the things that happen in markets, but they're not as hyper sensitive to that information as other style of investors would be. I guess the easiest way to say it in in terms of market pilance, there's no one tapping a corporate on the shoulder to kind of be like, well, you know, so,

how is your portfolio doing right now? So there's an element of where they're there tune in because there's definitely impacts their business, impacts their accounting flows, but it's not the same level of engagement that you'd get from a PM, either at a at a hedge fund or some other

you know, or an institutional account mark. When you look at the market sentiment and some of the technical levels with regards to the dollar, and you go back to the FED meeting a couple of weeks ago on the twenty or whenever it was, we had that sell off in the dollar that day after the FED announcement, and ever since then, it's kind of been hugging that fifty day moving average and we really haven't broken free from that, and I'm wondering how much UH sentiment has sort of

been uh battered, I guess by what we learned from the Fed that day. Yeah, it's a good point. It's uh. I think it's interesting in so far as the Fed is kind of obviously dial things back a little bit. The rhetoric has changed. UH. They're very comfortable and talking about before that meeting the concept that they're a long way from neutral, which means there's probably a lot more runway for interest rates to run high. And they've they've

done a very kind of orchestrated pullback from that. And now we even get from the recent meeting that we may only see, you know, not directly, but we've seen a big move in the in the dot plot, which to me was the most kind of the biggest glaring takeaway is that again there's a period of time where the dots are coming to the market and the markets still not moving towards the dots, and so it's more about the FED is kind of coming into where the

market thinks they should be, and so there's an element here of some kind of pause potentially next year. But I think for the dollar kind of if you're thinking d X Y terms, you know, the six of that basket is the Euro. So there's still an element here where the European news flow is still very sensitive to all the global dynamics. Um it's also very sensitive to the growth dynamics in Europe, which all of our short term kind of high frequency growth models haven't seen a

turn yet. So we're not overly bullish the Euro kind of the next couple of weeks or you know, if you were talking about in technical terms, in the very short run, but we're actually very bullish the Euro kind of second half of next year. I'd even say early second quarter where I think you're gonna start to see a turn in the Euro, largely because a lot of those growth dynamics been holding them back or are temporary.

So yeah, I think there's an element here where what we try to do is is we've re engineered C t A trading models, we look at other kind of proxies for for sentiment in kind of positioning, and so all of those signals kind of even running up into

the FED are all super stretched long US dollars. So this is part of that coiling spring where the market is kind of sitting in one direction and now you get an impetus, you get a trigger, and uh, I think the FED plus the correction of US assets is really kind of the force that's propelling the dollar lower

right now. But it kind of depends on again, which what which dollar you're looking at, because right now, you know dollar e M is something that's been very stable in the environment where you have lots of volatility, which is which is telling you a signal that you know, there's there's other things kind of going on in the FX market. Mark, what are your signals telling you about

the Chinese currency, the yuan? The remember, is it overvalued against the US dollar or as many you've already described, is it undervalued? Yeah, it's it's probably an element of it's still slightly overvalued relative to where Chinese growth should land next year. So I think there's still a story that dollar CNH is going to break through seven um, but I think it's something that's already kind of been priced in, has kind of worked through the market's understanding

of where we think these dynamics will land. So the impulse you have there is the US economy and the Chinese economy are are diverging. And also if you think about the impact of the trade wars, there's you know, there's an added beta that I guess comes through the impact of the trade war specifically on China. But the big driver of the Chinese growth story is really China leveraging.

So China has been trying to slow down its economy because it's trying to move capital from inefficient parts to potentially more productive parts, and that process in itself is actually generates slower growth in the short term. So our view is that dollar CNH will still kind of break seven, but the weakness in cnn or or the remn to be would come through other major currencies. So it's really and Chinese policymakers have been trying to focus people on

this as it's think more about the basket. So the currency can still weaken against everything, but it's not um you know, it's not a big dollar, you know, dollar remn to be reevaluation or or stronger uh bilateral cross. It's really that the rem to be could weaken against all these other currencies like the Euro, the yen, uh Norway, Sweden, um, some of the other major currencies, and even some of the emerging markets like India and Indonesia some of those others.

But the basket around c N is really a Taiwan South Korea c and why essentially low yielding Asian currencies still probably have some element of depreciation next year. You talk about, well, you talk about that CNH could weekend. I mean, I guess in a in a sort of a completely sort of free floating market, I would buy into that. But do you buy into this idea that the Chinese government is willing to sort of allow that to happen. Yeah, I think they want to manage it.

I don't think they want a big I don't think

they want a big movements in the currency. So whether it goes up or down, I think they wanted to be relatively contained because um, I think one of the biggest stories for next year is going to be and this kind of goes back to the view around the dollar, which is China is going to be a capital importer, which which means essentially that their current accounts surplus is gone and next year they will be reliant on foreign investment to maintain a stable balance of payments and also

to plug the current account. So I think what they're trying to do is kind of manage the currency in a way where they're showing foreign investors that it's a stable form of investment, and so they will be more reliant on portfolio flows, equity and fixed income flows and so kind of not I think. I guess reducing the volatility of the currency and creating some months more certainty around what the bands of direction are is something that

would be much more important for them. So I think, especially when you kind of look at the forward markets and things that have already been priced in, people are kind of expecting dollars c H to rally next year. So I think your their ability to kind of let

these market forces operate a little bit better. Also understanding that they will have to import more capital, I think we'll reassure investors that it's a it's a stable place to at least part more equity and more fixed income flow, which is part of the the process of kind of moving towards different forms of reserve currencies. Well, we're moving towards a process of lower lows. Right now in the S and P five hundred, we are down more than forty five points. That's a drop of one point eight

per cent. That translates into a decline of more than nine percent year to date. Mark McCormick, At what point did these US assets start looking attractive and attract foreign capital into the US? Well, then I think that's going to be the tricky part for next year is because what you're seeing is US rates on a rate of change perspective are dropping. US real rates are are dropping

as well. The U S yield curve is flattening. And so if you think about who the marginal savers are around the world, it's the Europeans, and it's actually the Japanese. It's not it's the current account surplus countries no more, no longer, the Petrol States and China. It's actually g ten countries like China are like Japan and the Eurozone. So the question becomes, why would the Europeans and the Japanese want to reinvest in the United States? And this is where it comes back to the shape of the

yield curve. It comes back to the hedging costs. So for US, the major story for next year is yield curves outside the US are much steeper, Thanks very much, and that's where we're gonna be looking next year, a steeper yield curves. Mark McCormick TV Securities, North American head of FX Strategy. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom

Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio