FX Market Lining Up to Overreact to Data: SocGen's Juckes

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00:00Let's talk about this FX market driven in the first half of this year by perceived capital flows.

00:04Do you believe that in the second half of this year it will be driven by rate differentials and why?

00:12Rate differentials up to a point, expectations about growth which are often the same thing.

00:17But yes, I think that people are genuinely uncertain in the sense of at the moment they're uncertain

00:22but aware of the fact that the world is very long dollars because we've all put so much money into the U.S. equity market,

00:28because money has gone into the U.S. treasury market, because the U.S. has been outperforming for so long

00:32and that if the economy slows, rates need to come down significantly,

00:36then some of the returns people have enjoyed are pretty vulnerable.

00:41I think the market's confused about the short-term rate story

00:44but confident that the answer is, is the U.S. economy slowing a little

00:49or is it in more danger of a more significant slowdown?

00:53And that means we're overreacting to every single piece of macroeconomic data

00:57with the exception perhaps of the really sort of minor data we saw yesterday.

01:01But we're lining up to overreact to each piece we get going into September.

01:04Taking a step back, Kit, earlier this year it seemed like a one-way freight train of sell dollars,

01:09sell the United States.

01:10That was the trade and pretty much everyone lined up behind it.

01:13Is it over?

01:14We've kind of plateaued and kind of shifted around this level for a couple of months now.

01:18Are we seeing sort of the end of the sell the America trade

01:21and going back to this sort of nuanced overreacting to every data point type of landscape?

01:27I think the data will decide that.

01:29I think the question then is whether the U.S. economy is slowing significantly.

01:32I mean, you know, a currency can't go down as fast as the dollar did

01:35or go up as fast as currencies like the euro did for very long.

01:40An inflation-targeting central bank reacts to fast currency moves.

01:45An economy reacts to fast currency moves.

01:47So the move we had in euro dollar from 102 up to 118 was too fast.

01:53We have to take time out.

01:54Whether that takes us to 125 or we get stuck here depends on how much

02:00or how little the U.S. economy slows in the next three months, I would have said.

02:04And if we got a repeat of last month's payroll numbers,

02:07if we got something genuinely soft,

02:09then I think we're going to head off into the middle of the 120s for euro dollar.

02:12We've got another 5% to 10% weakness in the dollar in this cycle to come.

02:17But, you know, I wouldn't want to over-interpret some of the data

02:22that we've had in the summer and extrapolate it out blindly

02:25as saying that is what's definitely going to happen.

02:27Again, if the inflation hit from tariffs isn't too big,

02:31the economy is not going to slow too much.

02:34And a very gentle easing in U.S. growth doesn't justify much dollar weakness at all.