Interview

«The Dollar is Going to Go Down»

Marc Chandler, Managing Partner and Chief Market Strategist at Bannockburn Global Forex, talks about the consequences of the US elections for the American economy, for the trade war with China and for the Greenback. He also hints at opportunities for investors.

Christoph Gisiger
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The reaction is powerful: Around the globe, equity markets are recording significant gains in the wake of the US election. On Wednesday, the S&P 500 advanced by more than 2%, with high-growth tech stocks and health care names in strong demand.

After President Donald Trump was initially in the lead, a victory for his challenger Joe Biden looks more and more likely. Votes are still being counted in the states of Pennsylvania, Georgia, Nevada, and Arizona.

From Marc Chandler's point of view, however, the stalemate in Congress is as important as the race for the Withe House: «You’re looking on a much smaller fiscal stimulus package than we would have had in the case of a blue wave,» says the internationally renowned macro expert.

In this interview with The Market/NZZ, the Chief Market Strategist at Bannockburn Global Forex explains why the relationship between China and the USA will remain tense even under a Biden presidency, why he expects the dollar to depreciate and why he currently favors Japanese stocks.

Mr. Chandler, the US elections are moving financial markets around the world. What’s your read on the current situation?

When we teach young people to drive in the United States, we say: «Aim high in your steering: Don’t aim just for the couple of feet of pavement in front of the car, but aim down the road a bit.» The same thing goes for investors. The election is a bit messy, and we have different layers with the popular vote and the electoral college vote, and each state has its own rules about what to do with mail-in votes and how long you can vote for, and all these specific rules. But for investors it’s best to look at the big picture.

So how does the big picture look?

«You have to ask the question of what the future of the Republican Party is going to look like.»

«You have to ask the question of what the future of the Republican Party is going to look like.»

Photo: Victor J. Blue/Bloomberg

You can see what is happening: Even if Biden wins, the Democrats don’t have a 60-vote majority in the senate, so some kind of compromise would be needed. So you’re looking on a much smaller fiscal stimulus package than we would have had in the case of a blue wave.

The US economy has already been losing momentum since the end of the summer and, in view of the sharp rise in Covid figures, is dependent on further life support. What kind of compromise can be expected out of Washington now?

You have to ask the question of what the future of the Republican Party is going to look like. Is it going to be Trumpian, or is the GOP going to go back to its roots which are free trade and fiscal austerity? I suspect that now that the Republican Party is maybe no longer in the White House, it will find that fiscal authority has a lot to recommend itself even though it might be the wrong time, given the level of unemployment and the slowing recovery. With the second wave of Covid, what was interesting to me was that on Monday, the US Treasury Department began to lay the groundwork for next week’s quarterly funding. And they said they’re assuming a trillion-dollar stimulus next year.

What’s your take on the bond market's reaction to the election against this background? The yield on the ten-year Treasury fell sharply on Wednesday and is now back below 0.8%.

I think part of it is that the bond market is trying to digest this new supply. And the reason why it rallied in response to the lack of a blue wave is that instead of having a two trillion-dollar stimulus we will get one trillion.

How big is the danger that this economic stimulus package will be passed too late, leading to a double-dip recession in the US?

Chances are that a European country like Italy, Spain or even France will get a double-dip recession. I’m not so sure I see it quite in the US, partly because of the reluctance to take the necessary measures to contain Covid. Basically, growth is made possible because we oppose strict social control. We might look back at this and think how many lives it cost us to get that growth. Also, I still believe we’re going to get another fiscal push early next year. It’s not at the end of this year in the lame duck session. A trillion dollars is about a 5% budget deficit. So if we are going to spend another 4 or 5%, that might be enough to prevent a contraction in the economy.

What does this mean for the Federal Reserve, which is going to announce its interest rate decision today?

The Fed has made it clear that they have done what they can under current conditions. The big change in recent months has been that the Fed has adopted an average inflation target. This did not require any new policies to enact. It’s really about forward guidance, ensuring the markets that they are not going to raise interest rates quickly until the labor market heals.

What are the next steps to be expected from Fed Chairman Jay Powell?

The Federal Reserve has been beating the drum for fiscal stimulus. So far, it really hasn’t been forthcoming. If it’s a trillion dollars, I think the Fed would take it and see what happens.

So the Fed will not just pump more liquidity into the markets?

They probably won’t do anything big until well into next year. Previously, I thought the Fed would introduce yield curve control by targeting the middle part of the curve, maybe the three to five-year maturities. That seems less likely. The next step of the Federal Reserve will probably be lengthening the maturity of the bonds they’re buying, like the Bank of Canada just did, and the Reserve Bank of Australia did. This is just to support the long end of the market.

The balance sheet of the US Federal Reserve has now mushroomed to over $7 trillion, In the meantime, the national debt has risen to 105% of GDP, the highest level since World War II. How big is the risk that inflation will get out of control as a result?

The most immediate challenge is not that we have too much inflation, but that inflation remains too low. In a strange way, this has been the story of our generation’s careers: Since the late 70s and early 80s, interest rates and inflation have been generally trending lower. We get these occasional counter trend bounces, but they tend to be muted and less steep than the previous bounce. Whatever it takes to change that: I don’t sense it’s in place yet, with the slow growth and the high levels of unemployment.

Then again, in daily life, people observe rising prices.

Of course, you can get a run on a particular good like toilet paper or hand cleaning. But the kind of inflation economists talk about is a general increase in the price level. It’s like a big matrix: You can’t just change one part of it. It takes a change in circumstances and I’m not sure that we’ve turned any major corners. Maybe if we get a vaccine in the first part of next year, that starts a turning of psychology and a new force enters. But whatever it is that can do it, I don’t see it’s here yet.

Let's get back to the elections: What impact will the outcome have on the dollar?

The dollar is going to go down, no matter if Biden wins. Even beyond the election, an important factor will be the twin deficits in the US. I think we’ve seen the Dollar’s third big cyclical advance since the end of Bretton Woods. Then, we have been broadly going sideways with the dollar index for a few years, roughly between 90 to 101. With a breakdown, we’re going down towards 80 over the next year or so. Keep this in perspective: If I’m right and the dollar has these big cycles, you should look at where it was at the low point of the last cycle which was at 70 in 2008, just as the great financial crisis was beginning to hit. Because of the negative rates in Europe, the second wave of Covid and all these other challenges in the Eurozone, maybe we don’t have to aim for these historic lows yet. So if we’re modest and talk about 80 or 82, that still gives us a big bear market for the dollar, but not necessarily over the top.

What does this mean for the exchange rate against the Swiss franc?

Honestly, I lost a lot of interest in the Swiss franc. I’m fascinated by the Swiss National Bank, but the franc itself is like the Euro with an option: There are a lot of people who still don’t believe that the Euro has sustaining power and that the Euro is part of the future. So if the Eurozone were to break up, what currency would benefit? Well, you want to own the Swiss franc. That’s why I say that the Swiss franc is like the Euro with an option.

At what dollar rate will the franc trade in a year?

For the end of next year, the market is looking at an exchange rate of 0.92. I think that’s very conservative; it will be closer to 0.88. Of course, that’s a challenge for the Swiss officials, but it seems to me that the SNB is really more interested in the exchange rate against the Euro than in the exchange rate against the Dollar.

Recently, there have been significant shifts in the dollar’s exchange rate against the yuan. Since the end of May, the dollar has lost more than 7%. What would change in the tense relationship between the US and China under a Biden presidency?

The US elites share this belief that President Xi Jinping has taken China in a different direction and that he has stopped the reforms that have been leading to a cooperative competition between the US and China. So I don’t think a Biden administration could simply unilaterally lift the Trump tariffs. It would be a sign of weakness and it would be a poor signal to send. On the other hand, the US confrontation with China is still in early stages, it’s bipartisan in nature and it is also multi-faceted. So I see a different personality, but I don’t see a change in substance. There may be stylistic differences: For example, one of the first things that President Trump did when he was sworn into office, was to call the Taiwanese president. I don’t think we will see a President Biden do that.

What kind of consequences does this have for the financial markets?

There is an interesting contradiction: On the one hand, areas like the US and Europe want to become more self-reliant, say when it comes to things like medical devices and rare earths. But as trade becomes more tense, China is being integrated in the global capital markets: Its bonds and stocks are being included into the global benchmarks, and you see foreign capital flows into China. China offers more than 3% on the ten-year bond. That might appeal to investors, since the US is at about 80 basis points and Europe is negative. What also might appeal to investors in this world of over 15 trillion dollars of negative yielding bonds is that the People's Bank is not doing policy experiments like negative interest rates or QE.

And what about America's relationship with Europe?

In the big picture, the US is sort of carving its own path. I don’t want to say American exceptionalism, but America seems to be dancing to a beat of a different drummer right now. To me, beyond the election, there is a rise of economic nationalism in the US, but also in the world. And in the US, there is also a strain of unilateralism: Many Americans, especially in the elites, do not think that the international multilateral agencies are doing much of the US’ bidding right now. So some things may change, there will be room for a Rapprochement. There is a reason to suspect that Biden would like to show good faith, for example by lifting the steel and aluminum tariffs imposed on national security grounds against our allies. But the US opposition to North Stream II, the slowness in boosting NATO spending, the fact that Europe still has a large trade surplus and does not like its currency to appreciate, or the issue of the French imposing a digital tax: These are issues that will remain whether it’s Biden or Trump.

How should investors position themselves in this environment?

That’s a tough question. We’ve had a very strong rebound in the equity markets from the lows in March. Now, we’re seeing more curfews, social restrictions and work from home mandates throughout Europe. We haven’t dealt with the Covid crisis in the USA, either. So for me it’s really about sticking to one’s knitting and there is no substitute for doing one’s homework. For me for example, I’m looking at places that are maybe mispriced. For instance, a good number of Japanese companies trade below their cash they have on their books. I’m looking for those kinds of opportunities.

Where else do you spot opportunities?

Even as I'm getting older, I also like things that say something about the future, like biotech stocks. It’s also good to have a theme. Since I think economic nationalism is on the rise, that means there will be more manufacturing in the US, even though manufacturing means more computers and robots instead of more workers. So I look for US and European manufacturers, companies that can be in a position to benefit when countries are relying more on their own medical supply and devices, medicines or even recycling rare earths. The rare earths in the new iPhone for example, are all recycled.

Marc Chandler

Marc Chandler has been covering the global capital markets for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 2018. Chandler holds master's degrees from Northern Illinois University and the University of Pittsburgh in American History and International Political Economy. Currently, he teaches at New York University Center for Global Affairs, where he is an associate professor. A prolific writer and speaker, he appears regularly in the press and writes the popular Marc to Market blog. In February 2017, Chandler's second book was published with the title «Political Economy of Tomorrow» and takes an insightful look at the concept of surplus.
Marc Chandler has been covering the global capital markets for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 2018. Chandler holds master's degrees from Northern Illinois University and the University of Pittsburgh in American History and International Political Economy. Currently, he teaches at New York University Center for Global Affairs, where he is an associate professor. A prolific writer and speaker, he appears regularly in the press and writes the popular Marc to Market blog. In February 2017, Chandler's second book was published with the title «Political Economy of Tomorrow» and takes an insightful look at the concept of surplus.