© Christian Lawrence
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At this stance, we do expect the Fed to raise rates by 25 basis points in June and we anticipate another rate hike of another 25 basis points in December this year. At the current moment, it is fair to say that this is in contrast to market expectations, as the front-end of the US interest rate market is currently pricing only a 14% chance of a rate hike in June. However, we think that is massively under-priced. Of course, as Lockhart pointed out, the rate increase issue is data dependent, meaning that if we see a sharp downturn in the data in a lead up to the meeting, then of course they could potentially delay the hike to September. Nevertheless, as it stands, we see the Federal Reserve raise rates by 25 basis points in June.
The US economy expanded in the Q1 at the slowest pace in two years; however, analysts suggest that it will speed up as the year goes along. Do you share this point of view or not and why?
We do think that we are likely to see a stronger reading. We expect the Q1 print to be revised upwards, as the first estimate of the GDP does not contain all the data that goes into the final estimate. Thus, we think that the subsequent release is likely to see an upward revision to the Q1 number. The reason for that was a very large seasonal adjustment, and we assume that there was too much of seasonal adjustment embedded into that.
What factors will influence the performance of the Greenback through the rest of the year?
Currently, we are very much in the camp that expects to see the Dollar appreciate. Indeed, there has been a period of weakness, as we saw the January sell-off in emerging market currencies start being reversed. Moreover, we have seen consistent strength within the Euro and the Japanese Yen, which have weighed significantly on the Greenback. That being said, we do think that we are likely to see another round of global risk aversion, and that safe-haven bid is likely to see money going back into dollars. If we are right on our forecast for US interest rates, then it will most probably provide a boost for the US Dollar. Thus, if we take a look at where we see the Dollar today compared to where we will see it by the end of the year, we believe that the Dollar will gain against most currencies on that timeframe.
What are your forecasts for USD/CAD, EUR/USD and USD/JPY by the end of 2016?
Our current forecast for the US Dollar against the Canadian Dollar is 1.31 by the end of this year, while for the Japanese Yen we have 113. As concerns the EUR/USD currency pair, we see it finishing the year of 2016 at 1.07.