"The only function of economic forecasting is to make astrology look respectable", J.K. Galbraith, or was it Ezra Solomon?

Wednesday 6th July 2016

  

"The only function of economic forecasting is to make astrology look respectable", J.K. Galbraith, or was it Ezra Solomon?

ref:- "It's Dollar's Time Now Post-Brexit, Top Currency Forecaster Says", Bloomberg

Let's not get into a row about which of the two heavyweight economists actually said it first, the much-borrowed quote seems appropriate far more often than experienced traders would like to admit and never more so than in the aftermath of a shock Brexit referendum result. It certainly sprang to mind as market players scrambled to adjust both their own forecasts and their trading books (just who did buy GBP / USD at 1.50 anyway?). But that doesn't mean everybody got it wrong  --  there are two sides to every trade, after all  --  and top of Bloomberg's rankings for the most accurate currency predictions in Q2 comes Julius Baer Group Ltd.

Not only was the Swiss private banking concern amongst the most bearish when it came to Sterling (even if they too failed to see Brexit coming), but more than anyone it also correctly identified the Japanese Yen as the major safe-haven of choice. So hats off to them, and whilst we know that in this game you're only as good as your last trade, it would be interesting to know what the punter in form has selected for Q3. The answer sounds familiar, and for familiar reasons  --  the US Dollar.

In keeping with their climb to the top of Bloomberg's listing, Julius Baer were not one of the many who assumed at the start of the year that the Dollar would just continue its ascent. They actually took the opposite view, but they think it's the one to be on now though. The arguments have by necessity been tweaked a little, but many of them ring more than a few bells.

The Yen may have been identified three months ago as everyone's favourite refuge but it is now looking overbought. The same cannot be said of the US Dollar, for which there is also much greater natural demand. If you believe that the post-Brexit ructions are bound to continue, and consider the other destabilising issues on the horizon (European banks, EU politics etc), it must be right to stay friendly towards haven currencies, and this time it's the Greenback with most to gain.

Part of the thinking also revolves which view one takes about the underlying strength of the US economy. Julius Baer believe that the US will bounce back from recent slow growth and that the markets, which if you take Fed Funds futures that now suggest that an interest rate rise is now not likely until 2018, are dangerously underestimating the chances of a hike. They are not alone in thinking that the interest rate divergence play (US up , elsewhere down) that has been written out of the equation of late, may still be on. Even if US rates stay where they are, there's no doubt that the pressure in Japan, Europe and the UK will be on the downside for some time. Of course, readers will point out that things aren't always that simple : Japan's move into negative interest territory signalled the start of its huge rally. USD / JPY bulls may need some pretty convincing data Stateside if more obviously logical currency movements are to be resumed.

Anyway, for what it's worth (and they are reigning champions), here are the Baer predictions for the end of Q3 :

Euro: over 2% weaker to $1.08 (now at $1.11)

Jap Yen (after strongest quarter since 1995!) : over 4% weaker to JY106 to the dollar ( now at 101)

Sterling :  over 10% weaker to $1.1600 (now at $1.2950) 

Right or wrong, they make a cogent case. But one thing's for certain ..... these are particularly difficult times and particularly difficult markets, and more than a few will do their best to prove that Mr Galbraith (or Mr Solomon) had a point.