© Douglas C Borthwick
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China's stock market limped through another week of losses, sending ripples into U.S. market performance. The recent devaluation of the Yuan has already started creating tremors in the global markets, more precisely in the US economy, as it is triggering an imbalance in international trade. How do you evaluate the damage for the US economy, in case if China continues to face a deep slowdown?
I suppose that China has only become a scapegoat over the last three days. The Chinese stock market has been in trouble over the past month and an half, and the argument that has been made in the United States has always been that China is isolated from the US stock market. Only in the past few days, when we have seen these tremendous moves in the US that people are blaming China. I believe that the reality is that people are anxious about the strength of the US economy. That is regardless of what is happening in China. Certainly, if we talk about whether there is a bubble in China, I would say without fail. Do the Chinese PPOS have ammunition to stem that bubble? I would say absolutely. However, if you believe there is a bubble in the US, you could argue that the Fed does not have any ammunition. Thus, China may actually be a safer place right now than the United States.
A September Fed interest rate hike seemed almost certain until a couple of weeks ago. However, the plunge in the global stock markets, provoked by China's economic slowdown, is now raising doubts in regards of the anticipated September rate hike. Taking this into account, to your mind what measures may the Fed take to improve the situation and make it less painful for the US economy?
I do not believe that the Fed is going to do anything monetarily in terms of more QE just to help the US stock market. I believe that is a fallacy, and in my mind certainly they will not raise rates this year. I suppose there is going to be a policy action and then they will start saying they are going to be on hold for a little bit longer. Thus, that all may provide some support to the United States economy.
The US dollar was also hit as expectations disappeared for an imminent US interest rate hike. Taking this into account, what will be the general performance of the US Dollar until the end of 2015?
I believe with the Dollar sell off going forward, we will probably see it trading at 1.1750 again. Talking about the USD/JPY currency pair, I think we would probably stay around this 1.19 area.
What are your forecasts for EUR/USD, USD/JPY and GBP/USD for the end of this year?
We forecast for the end of this year to see the Euro trading back at 1.20 levels, the USD/JPY currency pair at 1.20 and the GBP/USD at 1.60 levels.