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Rich Asians mostly stick with US dollar rally UBS sees almost done

Friday, November 27, 2015 - 07:16
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UBS Group AG, the world's largest private bank, is telling its wealthy clients that the US dollar's gains are set to be limited as the Federal Reserve will probably tighten policy gradually after liftoff next month.

[ZURICH] UBS Group AG, the world's largest private bank, is telling its wealthy clients that the US dollar's gains are set to be limited as the Federal Reserve will probably tighten policy gradually after liftoff next month.

The Swiss bank initiated a trade this month to sell the euro versus Norway's krone - rather than against the dollar - for clients who have given it the mandate to manage their assets, said James Purcell, Hong Kong-based cross asset strategist at UBS's wealth management business. The greenback is poised to peak around US$1.05 against the 19-nation currency even with the prospect for further European Central Bank stimulus , he said.

"The US dollar remains a strong currency that will, on bias, appreciate, rather than depreciate," Purcell said in an interview. "But the bulk of the move probably has already happened." The first US interest-rate increase since 2006 is expected next month by mostinvestors, helping push the dollar up by about 9 per cent against a basket of 10 major currencies this year. After the initial liftoff, the Fed is poised to raise the benchmark once every quarter in 2016, Purcell said.

"Anything more aggressive would be US dollar positive," he said. "The market is pricing in the shallowest increase in interest rates."

Clients in Asia, averse to making risky bets before the Fed's policy decision, still feel "far more comfortable" with investments denominated in the US currency and Hong Kong's dollar, which is pegged to the greenback, Purcell said.

The dollar last traded at US$1.05 per euro on March 16, the same day it surged to the strongest level since January 2003. It was at US$1.0609 at 7 am on Friday in Tokyo.

The ECB, which meets Dec 3, will probably extend stimulus beyond its current end date of September 2016 and cut the deposit rate by 10 basis points from minus 0.2 per cent, Purcell said. The euro is poised to weaken to 8.6 Norwegian krone over the next six months, he said. It was at 9.19 recently.

The common currency has declined about 2 per cent against the krone since Norges Bank kept its main interest rate at a record low on Nov 5.

"Norges Bank is coming to the end of its easing cycle," Purcell said. "The ECB has further to go." Some of the hedge-fund managers attending a dinner organised by UBS in London this month forecast the euro will fall to parity against the dollar because of the divergence between the Fed and ECB, Purcell said.

The managers at the event included Scott Bessent, who is starting Key Square Group after overseeing George Soros's US$30 billion fortune; Och-Ziff Capital Management Group's David Windreich; Anthony Tutrone, head of the alternatives unit at New York-based Neuberger Berman Group and Dinakar Singh, the founder of TPG-Axon Capital Management, Purcell said. He declined to say which ones made the comment about the euro because details were confidential.

Some of the attendees were also more bearish on the outlook for the Chinese yuan than UBS, Purcell said. While they suggested that the yuan could depreciate past 7 to the dollar, the Swiss bank predicts it will weaken more slowly to 6.6 by the end of next year, he said. The currency was at 6.3896 a dollar. China's Aug 11 yuan devaluation had pushed its volatility to a record high.

China has "the will, in terms of the image they wish to project to the outside world, and means to ensure that any depreciation is managed," Purcell said. "The move the hedge-fund managers are suggesting - over 7 - requires something that's quite disorderly."

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