Let us talk about the dollar weakness first and the rupee also has remained very volatile for now, appreciated from its all-time peak of about 87.5. Do you think the US dollar weakness is going to continue?
Peter McGuire:
Yes, I do think so and I feel as though across a couple of different points. First, if you look at as far as yields are concerned, they are running at around 4.47% now for your 10-year, 4.97% for the 30-year. Now, as far as the dollar is concerned, we have just seen a very solid downdraft over the last couple of weeks, certainly test those 98 levels. It bounced again at 100 and the US dollar index is currently running at around 99.7, 99.8. I feel as though the downdraft will continue and further softness and I feel as though euro, yen, and pound will certainly benefit from that and will get stronger.
What is keeping you busy these days? Last time when we spoke to you, you were buying a lot of gold and you were selling a lot of oil. What is keeping you busy these days?
Peter McGuire: Yes, I still think that that is going to continue. I feel if I touch on the oil side of it, what happened and transpired over the last couple of weeks with Prince Mohammed bin Salman, and President Trump, I feel as though that downdraft of crude oil – the OPEC meeting being around the corner will increase production and that is going to push prices lower. That is the first part of that, so that is going to be a benefit, and good for inflation.
On the other side, gold has given up some of that gain, but it is still running incredibly hot. 3325, the gold to silver ratio is still 100 to 1. It is having a little bit of a break, a little bit of hot air has come out of it, but I still think it is going to be a higher price than what it is at the moment.
Consequently, how much could the dollar index fall to from the current levels of around 100?
Peter McGuire: I want to test 98, maybe a 97.50. I want to see what is going on as far as Fed Chair Powell is concerned. If you are going to see a rate cut over this summer period, I do not think you are going to see a Fed rate cut this quarter, we have only got a month and a bit to go, so is it going to be a July, a hot July, August as far as rate cuts and are we going to see successive ones after that and that is what I am waiting to see.
If you are going to see rate cuts, I would think that that would push the dollar lower and we have got to be very mindful about what is happening as far as tariff policy is concerned and what does the EU navigate towards and get those the conversation and negotiation locked down over sometime in June for Eurozone/US.
The BOJ or the Bank of Japan also has been playing a very crucial role. They have abandoned the yield curve control programme given the inflation in Japan. They plan to now adopt a very hawkish approach as well given that Japanese investors are the biggest holders of US treasuries. Do you see them hunting for better yields back home and the consequent hammering of the greenback?
Peter McGuire: I have got to be conscious of the other side of Japan’s 40-year bond sale. It is the weakest demand since last July. That has just held and that is probably not a good sign and I think they will probably have to bid up higher as far as yield. So, will there be a flight back to Japanese bonds? I would not be surprised. You have also got to take on board where the yen is traveling because we have got a fairly strong yen back at 144, far stronger than that 160 handle. That is the first sign of it. You have got a return to try and get some growth into the Japanese economy. GDP is negative and CPI is running at about 3.6% and that is not a good sign overall.
Why has China not lived up to what we thought was the year that belongs to the Chinese stock market and the Chinese currency? The consensus view somewhere at the beginning of the year was long China, long China, and only long China.
Peter McGuire: There are a couple of things. First off, I do not feel as though the property sector has been put to bed as far as that debt overhang. Second, Trump’s push to take manufacturing back to the US and the tariff situation with China seems to be again very much a work in progress. What is going to be the final number for the tariffs? Over the weekend, beside the US-EU talks, there is the issue with Apple being asked to bring iPhone manufacturing back to the US or pay a 25% tariff on that. I think this is going to cause much concern for the Chinese economy moving forward over 25.
From here, where do you see the dollar index headed and what is the thing that you are looking forward to in terms of the US 10-year yield because these two crucial numbers are being tracked.
Peter McGuire: I want to keep 97.5 as a handle for the US dollar. If it goes under 97.5, you are going to see a 96. But it has gotten close to 100 at the moment. I want to see rate policy, what is going on from the States as far as the Fed is concerned and I want to see numbers coming forward as far as inflation and what is going on with GDP. All this will happen by the end of June. I am looking forward to the non-farm payrolls week, which is the first part.
So a softer US dollar and secondly, 4.47% is the 10-year bond yield at the moment. It has given up a little bit of that hot air, but I still think that probably a push around that number is achievable unless something dramatic happens. And that is going to be bid up for bond yield in the short term.
If you have to punch in one long trade and one short trade for the rest of the year, what would that trade be?
Peter McGuire: Gold long, crude short.
That you told me six months ago.
Peter McGuire: Yes, it happened, didn't it? Have a look at what happened. You and I would be sitting here, we would be very wealthy people if we traded. So, if gold has continued that updrift, I think $3600, 3700 is achievable sometime in Q3. The oil market is softer from here because of increased production, I want to hear what the rhetoric is coming out from the OPEC meeting next week and compliance is a big number. That is where everyone is focused, compliance.
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