“As long as the U.S. economy continues to recover, I don’t see why the undervalued dollar should not experience a broad-based recovery that I had expected at the start of the year,” said Stephen Jen, a partner at London-based investment company SLJ Macro Partners.
Archive for July, 2014
The prospect of an increase in U.S. interest rates will do more to cap the pound’s gains than BOE policy, said Stephen Jen, managing partner at SLJ Macro Partners LLP in London.
While Fed Chair Janet Yellen told lawmakers this month that the U.S. still needs an accommodative monetary policy, she also said borrowing costs may rise sooner than investors expect.
Jen and O’Neill at UBS both see the pound stalling against the dollar as a result, though they expect further gains versus the euro on bets the European Central Bank will ease further. Sterling has surged 10 percent versus the euro in the past year, the most since the shared currency’s 1999 debut.
“The pound-dollar exchange rate may encounter some headwinds in the period ahead, and it will be about the recovery in the U.S. more than the U.K. story,” Jen said in a July 24 interview. “A lot of good news has been in the price.”
To Stephen L. Jen and Joana Freire, economists at SLJ Macro Partners LLP, a London-based hedge fund, rates are too low and vulnerable to a reversal. They suspect emerging markets aren’t solely responsible for what they call the Global Savings Glut II.
Instead, they see a turnaround in corporate investment spending as a powerful enough force to push interest rates higher by running down savings. That would upend the recent lull in financial markets, especially if rates return to moving roughly in line with economic growth rather than undershooting it as now and in the mid-2000s.
“The levels of the real interest rates seem too low, in our view, and the pent-up pressures for interest rates to rise will increase as the global economy gradually recovers,” they wrote in a July 9 report. “A comprehensive risk-repricing triggered by higher interest rates is likely at some point.”
The worry recalls the last episode a normalizing of rates, which they say contributed to the collapse in the U.S. housing market and subsequent financial panic. While Jen and Freire don’t predict a global crisis this time, it won’t take much of a move to throttle markets.
“Risk assets could be vulnerable to a significant correction, ironically as the global economy recovers and necessitates the central banks to normalize their extreme monetary policies,” they conclude.