© Douglas Borthwick
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In my opinion, one major change that we are seeing from the Fed with Yellen's appointment is the fact that they are no longer going to carry the burden of the U.S. economy on their shoulders. The officials want to share the burden of where the U.S. economy moves, which is why we witness this taper going on a very steady basis, while at the same time we are seeing U.S. economic numbers getting worse and worse. Thus, for a while the U.S. Congress failed to act on the U.S. economy, because they knew that the Fed would be there, providing easy money through QE. The Fed though has built up its very large balance sheet, which they are uncomfortable with. The Fed knows the only way that they can prod Congress to act is to reduce the size of the balance sheet or at least slow the expansion of it even as we see worse economic numbers, because that will force Congress to put in spending or infrastructure programme for the United States that will take some of the U.S. economy burden off the Fed's shoulders. What we might see is Yellen pushing back against Congress, which is something that Bernanke would talk about, but never actually did.
In your opinion how will the greenback behave with Janet Yellen as the new Fed's Chairwoman?
To my mind, there is a common assumption out there, which I believe is incorrect, that U.S. interest rates will rise as QE tapering plays out. I think that interest rates will stay very low for an extended period of time. What that means is that investors, who are looking for Dollar strength, especially against the Euro, are going to be surprised to see that the greenback will actually weaken versus the Eurozone currency. Over the past three years, people have called for the Euro to collapse against the U.S. Dollar and for the greenback to rise. Instead we see the Euro rally and this is not due to people's expectations of what is happening in Europe, rather because the U.S. is in fact much weaker under the surface than Europe is overall.
What to your mind might be the major headwinds for the U.S. economy and its' currency throughout the 2014?
I think that the biggest headwind that the U.S. economy faces is a lack of real growth. What I mean is the US has witnessed anaemic growth over the last few years, that was created by the Fed's monetary quantitative easing and this has given us an income effect via the rise in the U.S. stock market; however it has not really done much for U.S. housing, only stabilizing it. As you see tapering coming to an end, you will witness the stock market start to slowly stabilize around these high levels and then begin to come off alongside the housing market. In addition, when you look at the employment numbers, the market will have to realize that it is not really as strong as the unemployment rate would suggest. That is due to the fact that so many people left the workforce because they became disenchanted with the possibility of finding a job. One of the most important numbers that I look at is food stamp issuance in the U.S., a number that is trading at new highs as 47 million people (or 15% of the US population) receive food stamps. In my mind this number needs to turn around before we can expect any sort of real growth in the U.S.
What are your forecasts for EUR/USD and USD/JPY for the end of Q1 and end of the year?
At the end of the first quarter, I would be looking at 1.43 for the Euro and I expect 1.50 by the end of 2014. As concerns USD/JPY, the Japanese want to weaken their currency more than the U.S. can weaken theirs', thus I forecast USD/JPY at around 104 by the end of Q1 and 108 by the end of the 2014.