By Gareth Vaughan
The world may be a tumultuous place with the way currency markets are analysed changing, but the United States dollar still looks pretty good, says ANZ Head of FX (foreign exchange) Research Daniel Been.
During a visit to New Zealand the Sydney-based Been told interest.co.nz in a Double Shot interview that whilst analysing the global currency markets, major structural shifts need to be taken into account.
"There's no doubt that when you look at the US and China there is a real shift in thinking on both sides on what their future relationship needs to look like and the dynamics around that. Similarly you look at [South] Korea and Japan at the moment and they're having a similar conversation," Been says.
"In a world that has been somewhat deficient of demand over the last few years, where everybody has grown debt quite substantially and where GDP hasn't managed to build in a sustainable fashion across the entire world in a consistent way, those tensions are naturally going to rise. Because for everyone they're trying to seek where was my advantage, what happened to it, what could I be doing and what are other people doing."
Been suggests this backdrop isn't going away anytime soon.
"I think that understanding geopolitical dynamics and understanding the power shifts and those sorts of things are the new economics in terms of currency analysis, and in terms of understanding where markets are going. When I started in currency markets you cared about this interest rate versus that interest rate, this current account versus that one, and I think the market to some degree has moved on from that," Been says.
"So the way that we've been thinking about the markets is to think about them in a much more holistic and top down fashion. Look at what are the big drivers, what are the major things that really move currency markets through in a consistent fashion. And what you find is that that really is an understanding of risk appetite and the behaviour of animal spirits. And it is the direction of the broad US dollar, where that is driven by relative policy as well as its reserve status."
"So I think really in looking forward on currencies it's more a question about where those dynamics are going rather than it being what central banks are doing in this so-called race to the bottom or currency wars. Because I don't think any central bank is entering this with a view that they are doing it for a war. They all studied economics, they all know about the 1930s. This is not, I don't think, about that. It is about recalibrating about how you think about the world in a world that has become immeasurably more complex," says Been.
Despite all this, or perhaps because of it, the US dollar comes out looking pretty good, Been says.
"It still has reasonable yield. Yes the US Federal Reserve is cutting [interest] rates as well, but ultimately the absolute level of yield is very good. Despite what we see on Twitter now and then the overall country has free, open capital accounts, they have deep liquid markets and the appeal of that in a world of uncertainty I think is going to remain."
"So we still think that the [US] dollar works," adds Been.
However the new low interest rate environment in Australia and New Zealand means the Aussie and Kiwi dollars have lost one of the things that used to be a natural support for them, he says. A lower interest rate structure means you can't find yields trading above those in the US. Whilst the global economic environment looks okay, Been points out Australia and New Zealand are small, cyclical economies, and price takers from the world.
"So for the two currencies to rise I would say you need to start seeing a world where interest rate differentials look better, and global growth starts to look better. And for now we're not predicting a global recession, but growth doesn't look like it's about to pick up rapidly. The risks to that growth with the trade tensions is probably to the downside. And in that context an investor who is looking around and sees we've got all of this cyclically [in Australia and New Zealand], and we're not getting yield relative to the US or somewhere else with deep liquid markets, why would our money go there?"
"In that sort of environment we still think the [US] dollar comes out looking pretty good, particularly against the Aussie and the Kiwi," says Been.
Meanwhile in terms of central banks, Been suggests we have reached a point where the balance between patience and flexibility and credibility is "really starting to come to a head," after a long economic recovery that "hasn't really taken us anywhere."
Nonetheless he believes existing monetary policy tools do still work.
"I think they do. The way I've always thought about monetary policy is that monetary policy is a great tool for smoothing cycles. But ultimately the responsibility for the direction of the structure of an economy falls to governments and falls to good regulatory policy and those sorts of dynamics. So I think inflation targeting absolutely has its place and central banks using it to smooth cycles has worked. There's no doubt that where we would have been in [the] absence of interest rate adjustments is a far more difficult place. Where we would have been in [the] absence of flexible currency regimes is a much more difficult place. And the flexibility that has put into the systems to allow time for governments to actually enact reform is very useful," says Been.
"I guess the challenge that they're up against is that we're in a world where there's an ageing demographic, where debt levels are already high, and so the ability for policy to actually have as much of an impact as quickly or as easily as it did in the past is maybe diminished. But to say that there's no role for it [monetary policy] anymore, I don't think that's the case."