| Q&A with Andrew Robinson, FX Strategist at
Saxo Capital Markets |
 With more headlines seemingly reporting of improving manufacturing, export, trade numbers and now some central banks looking to hike interest rates – what is Saxo's view of the outlook for the global economy? Are you of the view that we are finally bouncing off the bottom of the cycle into a V-recovery?
While the economic data is suggesting the global economy is slowly emerging from the recession nightmare, it has been predominantly driven by the vast amounts of "cash" – be it in the form of bank bailouts or stimulus packages that has been thrown at individual economies by the various governments and authorities. Once the impact of this stimulus wears off, there is a high chance of reverting back into recessionary territory or at least moribund growth. The recovery we will see is a 'W-shaped' one at best and we risk a period of flat-lining growth.
So it's a double-dip recession in your view--- how long do you think it will last? What would be the possible trigger and the panacea (surely a lot of governments are running out of fiscal bullets in their arsenals)?
For the reasons mentioned above, we risk seeing an extended period, around two years, of either long, protracted sub-standard growth or a period of stop and start growth in economies as governments realize there is a natural limit to how much they can borrow and, as a result, spend to revive their economies.
What will it take to convince Saxo that we are back on a genuine path to recovery?
In our view, the path to recovery is linked to "end demand". While all sentiment and confidence indicators have enjoyed a good run recently, we have yet to see this translated concretely into "actual" demand and activity. While the US jobs situation remains precarious, and the housing market remains subdued (without the tax credit incentive that is scheduled to expire on December 1st), the US consumer risks reverting back into his shell in the near-term. What we need to see is more sustainable gains in the "hard data".
What is your outlook on both equity and bond assets for the next two quarters?
It is worth noting that, with the Q3 US earnings season is well under way, and equity markets have failed to maintain their momentum despite most companies beating forecasts. With similar results in Q2, the S&P500 kept going from strength to strength. This lack of momentum coincides with stock indices hitting or approaching technical levels. We expect the 1,100 area to cap the recent S&P rally setting up a retracement back to the low 900s in coming months.
With regard to bond markets, recent talk that the Fed is considering toning down its "low rates for an extended period" stance has pushed US bond markets lower in recent sessions and, combined with the record issuance of debt that is coming on stream, we expect bonds to continue to trade with a heavy tone into 2010.
Gold has been soaring again, how long do you think the uptrend can be maintained and how high can gold rise to and why?
While it is a popular belief that gold is a good hedge against inflation, we argue that it is more a hedge against instability. It tends to rise in periods of unanticipated inflation (1982 and 1985-87), as well as during unanticipated deflation/disinflation (current). Thus, we expect the current rally to extend, initially towards 1,100 and longer-term towards 1,300.
Oil prices seem to be picking up too despite the fact that global recovery is not really evident yet. The fundamentals do not seem to support the upward trend towards the $70-80 levels, especially with so many tankers used as floating storages. How high do you think oil price will rise (and fall subsequently)?
With the ongoing support from a weaker dollar and the wall of cash that still exists, crude could go higher in the short term without fundamentals supporting the move. Recent storage data from the US has begun to show a pick-up in demand but storage still runs at high levels.
After having traded in a near 10-dollar range for the past five months, the break above $75 triggered a wave of short covering plus new buying from momentum funds. Short term, the market will be looking to establish a new top and the region between $85 and $90 looks like an obvious target for this. However, it is critical from a technical standpoint that we stay above the $70 mark to preserve the uptrend (and the downtrend in the dollar).
What is the Saxo outlook for other commodities --- metals, minerals and agriculture?
The continued flooding of cash from Central banks will lend support to most dollar based commodities, which in some cases could lead to a speculative bubble if fundamentals do not keep up. On the agriculture front, in addition to the falling dollar, the weather has begun to play a part. Frost and rain are delaying and possibly damaging the grain and soybean harvests. This should support agriculture prices on a broad basis.
One of the reasons for the rise of crude prices is the weakness in the US dollar. What your outlook for the greenback and other major currencies? The Aussie is strengthening --- why and how long do you think it can stay on the uptrend?
While it is a general consensus that the USD will continue to slide in the longer-term, we are sensing that Q4 might offer the greenback some respite, or at least introduce a more two-way market, within this broader downtrend.
The EURO appears to have benefited from some diversification away from the dollar but we feel this is masking some inherent weakness in the EU economies and the inflexibility of the exchange rate regime.
The pound sterling (GBP) has also underperformed, pressured by a very weak UK economy and extended quantitative easing measures by the Bank of England. The yen (JPY) has held its own ground of late, no longer the major funding currency for yield play strategies and supported by a new government's willingness, compared to the previous government, to embrace a firmer JPY.
The Australian dollar (AUD) has certainly been the darling of the markets both from a yield play perspective and also the faster rebound in the Australian economy. However, the market appears overstretched near-term and a mild correction would be a healthy development. With the Chinese economy expected to continue to rebound strongly, there would appear no reason why AUDUSD should not challenge the 0.9850 record high again.
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