Barclays' Macleod on FX Markets, Central Banks

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00:00Lots of factors for investors to mull over the trade deal, the Fed, the BOJ that's coming up.

00:07I mean, how is that all shaping the thinking of FX investors?

00:11Absolutely. Well, I mean, look, there's a lot going on right now.

00:14And, you know, you can contrast some of these headlines around trade and the Fed

00:18with a U.S. government shutdown that has put people in somewhat of a holding pattern.

00:21But the reality is some of the resolutions and, you know, hopefully what we'll see today,

00:25you know, around a trade deal between China and the U.S., this is good for markets.

00:29This is good for the U.S. to reduce this trade uncertainty.

00:32And on the Fed, I mean, look, I think, you know, when you think about reduced trade uncertainty,

00:38easier financial conditions because you've got equities at the highs.

00:43You've got a fiscal impulse coming next year from the big, beautiful bill.

00:46And it's no wonder that the Fed is saying, OK, look, the economy is doing really well here.

00:50This is a this is a tough environment to continue with the dovish message.

00:53And I think that's why you saw the pivot last night.

00:55So what do you do with the dollar? How do you position for the dollar?

00:58Some say it's still very much oversold.

01:01Yeah, absolutely. So, look, I think after Liberation Day in April, this de-dollarization

01:06theme that that really took hold of the markets was predicated on two points.

01:10The first point was that foreign central banks would reduce their dollar holdings.

01:14And the reality is, while we've seen that percentage go down a touch, most of that move was a valuation effect.

01:20And then the second point was that foreign investors were going to sell U.S.

01:23assets or at the bare minimum FX hedge their U.S. assets.

01:26And while we did see some of our clients increase their hedge ratios over the summer, those hedge

01:31ratios have come back down.

01:32And we're now hearing from clients that they're looking to buy U.S.

01:35assets again, specifically U.S.

01:37equities FX unhedged.

01:38So, essentially, what would that mean for Asian currencies?

01:42You talk about flows going to U.S. assets right now.

01:45We're seeing that from Korea, for instance, where retail investors are choosing to buy U.S.

01:50assets, ditching what's at home.

01:52I mean, what crosses are you looking at in particular?

01:54Look, I think the reality is U.S.

01:57exceptionalism still seems to be alive and well here.

01:59So, again, where the narrative on the dollar earlier this year had been very bearish, you're

02:04now looking at a scenario, again, with a more hawkish rhetoric coming out of the Fed, where

02:07I think people really have to reevaluate some of these positions.

02:11You know, you're looking at the BOJ today, and there's been a lot of focus on what the

02:15BOJ is going to do, and certainly dollar-yen.

02:17And I think that's a pair in particular that we think, you know, is going to move higher.

02:21There's concerns around fiscal policy loosening in Japan.

02:25We've heard from clients that they want to be short JGBs, short the yen.

02:29And I think, again, you know, given the political uncertainty, it's unlikely that the BOJ acts

02:33today.

02:34So, I think, you know, we're hearing from our customers, you know, that they're getting

02:37comfortable being long dollar-yen again.

02:39Of course, the focus on the weakness of the yen.

02:41How much do you think is a consideration, you know, for the BOJ?

02:45Is the weakness in currency a factor that it is considering in a big way?

02:49Absolutely.

02:49I think it is a factor.

02:51And for the BOJ, it's also going to be about the speed of the move.

02:54So, I think if that starts becoming unhinged, the risk that the BOJ has to do something earlier

02:59than maybe they would like probably increases.

03:02Volatility in the market, no doubt.

03:04How do you hedge against that?

03:06Yeah.

03:06Look, it's really tricky.

03:07Again, I think the Fed is in a very difficult position right now, given the lack of data

03:10coming out of the U.S.

03:12And there's a reason why you're seeing some of these markets consolidate right now, and particularly

03:15in currencies, we've been in a bit of a holding pattern.

03:18We're in a really tricky situation right now.

03:20If the U.S. shutdown resolves itself in the near term, there's a chance that you get two

03:26payroll reports in November.

03:27There's a chance that the market starts questioning the validity of the data coming out of the U.S.

03:31So, like you said, we are likely in for a period of volatility here.

03:35You know, for anybody that's concerned around a potential risk-off move, you know, Aussie

03:40yen is a pair that's highly correlated to risk.

03:43And that's, you know, certainly can, you know, can be a hedge for markets.

03:46You know, but again, we also think that the dollar probably has some upside here, given

03:49what's been going on.

03:50And how about closer to home, where we are, we're seeing weakness in a lot of the currencies

03:55here, like the Thai baht, like the Indian rupee, never mind that it is one of the favorite

04:00markets for a lot of investors.

04:02Will that weakness continue, given the expectations that the dollar could get higher from here?

04:07Yeah.

04:07Look, I mean, the reality is we've been, we've actually been in a lower volatility environment.

04:11And because of that, one of the more popular themes in the market is investors getting long

04:16what we call carry trades or the higher-yielding EM.

04:18And one of the favorite trades this year has been long Latin American currencies and short

04:23Asia currencies.

04:24And I think that trend is likely set to continue.

04:26And the biggest risk for the market right now?

04:28Look, I think it's, again, it's the uncertainty on the data coming out of the U.S.

04:31You certainly had a more hawkish pivot coming from the Fed today.

04:35And as I laid out earlier, it certainly feels that, you know, the U.S. economy is doing just

04:39fine.

04:39I mean, I can tell you from working in New York City, it's still, you know, things still

04:43very much feel expensive.

04:44And the city, you know, feels very lively.

04:46So, you know, this kind of premise that we were talking about over the last couple of

04:50months about a potential slowdown in the U.S., that doesn't necessarily feel like it's

04:53happening right now.

04:53So I think that's going to, you know, really challenge investors to rethink, you know, how

04:57they're positioned into the end of the year.

04:59Christian, thank you so much for your time.

05:00Absolutely.

05:00Thanks for having me.

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