© 4Cast
|
We see June as the mostly likely timing for the Fed to raise rates from the zero bound. However, the risks are skewed toward a later move as the Fed waits for "reasonable confidence" that inflation will return toward its 2% mandate. Given lackluster wage growth, in addition to oil price declines and the stronger USD, there will be some near term pressure that can filter into underlying core prices and muddy the picture. These factors could cause the Fed to exercise more patience. Nonetheless, we would still see a high probability of a liftoff by September.
Economists believe corporate debt would continue to rise if the Federal Reserve does not increase the interest rates. Corporate debt rose from $3.5 trillion in 2007 to its current level at $7 trillion, which is described by many as bubbly. Do you agree that debt is accelerating due to the zero rates? And do you believe the rates hike will improve this situation?
Corporate debt has advanced due to low rates as borrowers take advantage of the low cost of financing, while investors demand has been strong for relatively higher yields. Rate hikes, by definition, should moderate the growth of corporate credit though an expected gradual pace of Fed tightening, and very accommodative global monetary policy will ensure pullbacks are limited and growth continues in the sector.
There are hopes that significant foreign money will be attracted to U.S. Treasury rates if the Federal Reserve starts moving. Do you believe them to be right and do you believe the rates hike will bolster the economy?
Flows have been attracted to the US in anticipation of higher rates and given the relative outperformance of the economy. We agree that this trend will continue as rates rise and US differentials remain favorable. To be sure, in the immediate wake of the Fed raising rates there will be volatility as markets adjust to the actuality of the move with inflows into the US market, though we would expect a "one-off" adjustment, which mainly reflects capitulation in positions that are skeptical of the Fed's propensity to hike.
What will be the main drivers for the US Dollar for the end of Q1 of 2015 and what are your forecasts for EUR/USD, GBP/USD and USD/JPY for the same period?
With the US Fed, the only major central bank with an overtly tightening bias (though it could be argued that the BoE may have one too) we still see the prospect of widening interest rate differentials as offering the USD support. The US can also still boast the most obvious safe-haven status, especially given the belief that the SNB is still ready to take any necessary action to deter inflows into Switzerland, and that could again become a major factor as the Greek debt extension comes to an end in June.
While recent US economic data has been mixed it still stands up in comparison with most others and we do see the USD continuing to strengthen through 2015. However, in the very near term, i.e. the scope of this survey, there is a danger of a squeeze on established positions, and that is likely to slow or maybe even modestly reverse upward progress for a time. Our latest forecasts for month end are 1.11, 1.53 and 120 for EUR, GBP and JPY respectively, very close to current levels, with further upward USD progress through the balance of the year.