The Dollar Bull Case: AI, Productivity and Strong U.S. Earnings

SPEAKER_1 (0:00)

All right, joining us now to speak about the macro and the market, Steven Englander, who's the global head of G10 FX Research and North American Macro Strategy over at Standard Chartered Bank. Thank you so much for your time.

Steven Englander (0:10)

Thank you for inviting me. It's a pleasure to be here.

SPEAKER_1 (0:12)

Yeah, it's lovely to see you. And there's so much going on right now, Steven. I mean, obviously you're watching Iran, oil inflation, AI, debt, midterms, G4 deficits as well.

I know you say it's undecided on which will be dominant, but these are all kinds of issues that the markets have digested before at certain times in history. But what do you think could emerge potentially as the biggest risk right now? What are you keeping an eye on the most?

Steven Englander (0:35)

Well, I think the AI trade is important. And again, not because of valuations, because US productivity growth has been very strong. US has been very attractive to capital coming in from abroad. That's helped support the dollar.

Broadly speaking, we're always going to have a trade deficit. The question, the dollar is strong when we're more attractive to capital and inflows, then we're sort of putting money abroad through the trade deficit. So if we continue to see the same trend of the last couple of years of strong earnings, that should be positive for the dollar, and it could well go higher than where it is right now.

SPEAKER_1 (1:18)

Where do you see it going? I mean, for all the talk and noise in the background about, this is the era of debasement and the Iran War, and what we're seeing in oil perhaps is concealing some of that. I mean, you do believe we're headed for some strength here because of the AI productivity boom.

Steven Englander (1:34)

Yeah. I mean, that's been our theme for the last year, and we were kind of isolated as dollar bulls when we first jumped on it. Now, I think more of the market is giving it some credence.

In the short term, the thing is the market knows a lot, right? We know oil is at 110 We know that US interest rates are higher than everyone else. We know there are riots in France and the fiscal situation is very dodgy. So we may be in a period of consolidation where the market is sitting for a while and saying, what is going to lead us to break out of this? What theme is going to emerge? For example, say in the midterms, there's an 8%, 10% chance remaining that the Republicans take both houses of Congress. That's not a big chance, but were it to happen, I think we'd see rates go up, because they haven't been that fiscally conservative. And we'd probably see the dollar stronger, but we'd see the questions about the direction of the fiscal policy would reemerge, and that could be the theme for the next few months.

SPEAKER_1 (2:40)

Have you got a range that you're looking at as far as where yields could go right now? And is just north of 5% potentially on the lower end of a new range that we should be getting used to, do you think? And given the resilience in this economy?

Steven Englander (2:55)

Yeah, I mean, we're actually pretty optimistic on the US economy. And on the real side, business people seem very optimistic about where things are going. And again, it's not just a few tech companies. It's very prosaic companies saying that things are looking good.

We think 10 year bond yields can go up to 550 I mean, that's our baseline forecast, which means you add 20, 30 basis points around that to serve to give an appropriate range.

We're not done yet. The real question is, does it go up for good reasons? Because the US economy is strong, investment is strong, the earnings are coming. Or does it go up for bad reasons? Because we're afraid of inflation and because the fiscal picture is becoming dodgy as it is elsewhere.

SPEAKER_1 (3:44)

Are you worried about what's going on in Europe? I mean, as far as the potential for contagion risk, do you believe we could see that spreading or it's pretty contained?

Steven Englander (3:53)

Within Europe, you're already beginning to see it. I mean, Italy has a big debt, but its deficit is around 3% of GDP. But its CDS has doubled over the last month and its spread with Germany has gone way up.

Markets are beginning to look at Belgium as well. So I think it's not just a French story, even though it was France that made us focus on Europe.