Forex Video : Risk aversion and mid-term fate of the USD

On CNBC World Wide Exchange ACM Advanced Currency Markets Chief Market Analyst Peter Rosenstreich discusses the risk aversion trade and mid-term fate of the USD.

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Name: Peter Rosenstreich
Position: Chief Market Analyst
Company: AC Markets
Name: Stephen Roach
Position: Chairman
Company: Morgan Stanley
Date: 16/07/09
Time: 10:54 CET
Channel: CNBC Europe
Duration: 3 min 45 sec
Interview with Peter Rosenstreich & Stephen Roach

Ross Westgate
We turn our attention to the currency markets. We have just seen the Yen claw back some losses in the
last two previous sessions; Dollar/Yen: just below 94. Euro and Sterling have made grounds this week on
the back of the equity market rises, but as we’re a little bit soggy right now in Europe, Euro/Dollar and
Sterling has just come back slightly. Joining us for more: Peter Rosenstreich, Chief Market Analyst at
Advanced Currency Markets and, of course, Stephen Roach is still with us as well, Chairman of Morgan
Stanley. Peter, let’s just kick off with you. Look, the relationship between risk as evidenced by equity
markets and the currency markets is still pretty strong.

Peter Rosenstreich
Yes.

Ross Westgate
What’s it going to take to break out of the – do you see us breaking out of these ranges, on the up-side or
the down-side, though, when we get through this earnings season, or not at all?

Peter Rosenstreich
Well, I think we’re going to get a break on the up-side, meaning a weaker dollar when we come out of this
doldrums, if you will, this trading range. I don’t think in the near-term that we’re really going to break out
of any significant range. I think we’re going to put pressure on the sort of up-side in Euro/Dollar
resistance at 1.41, but, you know, right now the market is very confused where maybe the heat and the
summer low volatility has gone to traders’ heads. FX is looking at equities. Commodities are looking at
China. Who exactly is leading this rally and on exactly what news is very, very weak. We think that right
now there’s not enough support to move the market one way or the other. The optimism is probably
going to wane, and we’ll see a pull-back in risk appetite.

Ross Westgate
Do you have any sort of medium-term view on the Dollar? What is your medium-term view on the Dollar?

Peter Rosenstreich
Well, medium-term view, we see a weaker Dollar. One of the clear drivers is repatriation, or sort of the
reverse repatriation of flow. We saw during the financial crisis a massive in-flow of capital into US for the
safe haven reason much more than we saw in 2000 in the tech bubble collapse. That capital is going to
look for a higher risk premium, and inside the US is not going to be where money managers are going to
place their capital. They’re going to be looking to emerging markets, they’re going to be looking to
Europe, and then we’ll see a massive flow outside of the US Dollar.

Ross Westgate
Do you concur with that analysis?

Stephen Roach
Well, I think Peter’s right to focus on Dollar risks, Ross. American consumers have started to save again,
which is terrific news, but that’s been overwhelmed by this widening budget deficit in the US. America’s
overall savings rate, when you add up the personal sector, the business sector, and subtract out the
government’s deficits and adjust it for depreciation, the net national savings rate is negative for the United
States. America is hooked on foreign borrowing. I think what Peter didn’t say, but I think he would if we
asked him, is that that speaks of a need for the US to get some – or America’s lenders to get some
concessions from the US in terms of the way in which that foreign borrowing is financed. Those are
concessions that could show up in the currency and/or real interest rates. I think that’s very disconcerting
looking ahead.

Ross Westgate
Briefly, Peter, your response?

Peter Rosenstreich
You know, I agree 100%. I think Obama’s celebrating the fact that these Chinese reserves are moving as
fast as they can meaning cheaper borrowing, but at the end of the day, he’s going to have to pay up.
These lenders are not going to put up with the same sort of conditions, both on interest rate and currency
that they have in the past. That means a weaker Dollar.

Ross Westgate
Peter, good to see you. Thanks for joining us. Peter Rosenstreich, Chief Market Analyst at Advanced
Currency Markets.