No Fed hike? Shall we long EURUSD?

Richard fischer17 August,, Lagos –  According to former Dallas Fed President Richard Fisher, China concerns are “much ado about nothing.” He was known as a hawk on rate hikes while with the Fed. Fischer opines that China’s recent currency devaluation is not enough of an excuse to prompt a delay in rate hikes from the Fed.

In a CNBC interview, he said: “I think this would put in an awkward spot to use this as an excuse,”. “Hyper doves may use this as an excuse. But I don’t think it obtains.”

He acknowledged the fact that the strength of the dollar against other currencies around the world is a factor to consider in raising rate, but ” it doesn’t stop the economy,” which in the U.S. has saw some “pretty good numbers” recently, he said.

After the Yuan devaluation by the PBOC, the currency fell about 3 percent against the dollar in the past four days. It rebounded on Friday after a the three session drop.

The gravity of the fall in the Yuan has been belittled by Fisher, opining that it is nothing compared to the declines of 18 to 20 percent for the currencies of America’s two biggest trading partners, Canada and Mexico. The devaluation is regarded as an omission by the Chinese that their economy is slowing down. But Fisher said that’s not a surprise.

In similar vein, the US has its own local issues which the Fed will consider. According to a monthly report on fund flows (the movement of money into and out of mutual funds and ETFs) from Morningstar, the following trends are being strengthened as they have been gathering steam all year:

  • Outflows from U.S. funds to international funds
  • Outflows from active investment into passive investments

The report says: “Outflows from U.S. equity funds for only the first seven months of 2015 exceeded any previous annual outflows since 1993.”

Data shows the U.S. stock market is up only 1% for the year so far, while the the Vanguard Europe ETF is up almost 5%. And the WisdomTree Europe Hedged ETF, which removes the effect of the strong dollar, has had huge inflows this year and is up 12%. Hence, investors flee for higher returns towards such alternative investments from Europe like the Vanguard Europe ETF.

When the Fed finally raises rates, the dollar is expected to strengthen further, which may put further strain on dollar domiciled investments. Could this be a factor which may influence a No Fed hike? In that case, shall we long EURUSD?

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