The US economy needs to get stronger, unemployment rates have to fall lower and the traction in growth has to substantially increase before the US Fed can cut quantitative easing, says Arnab Das of Roubini Global Economics.
Speaking to CNBC-TV18, Das adds that he expects gold prices to significantly fall and the dollar has started to strengthen thanks to a recovery in industrial and energy sectors.
Below is the edited transcript of the interview on CNBC-TV18
Q: The next big cue is Ben Bernanke's testimony in front of Congress. But there is much talk about the possibility of a reduction in the monthly bond-buying process. What do you expect?
A: I think there have been several statements from various Fed governors and signals from the Bernanke himself that there might be some tapering in the near-term, which is a bit of a shift from what has been the general expectation and certainly our expectation as well that the economy isn’t strong enough, unemployment rate isn’t low enough and there isn’t enough traction in what’s happening in growth and changes in employment to pull the plug on quantitative easing (QE) already.
So I think a part of the problem is with fiscal policy heading in the opposite direction in United States and many other countries in the West, from monetary policy. So there are concerns about that, there are concerns in the Fed board and elsewhere, that market prices are being distorted and a froth of bubbles is being created.
So I think there will probably be some more jaw-burning around this issue and this issue is probably one of the things, maybe the main thing, that is causing this incipient kind of correction or at least a pause in the upside in the markets to come through, especially given that we have string of concerning data.
Although there has been some noisy data in West, there has been some worse than expected data on some fronts in Europe as well, plus emerging markets including India not growing so strongly anymore. So I think people are concerned.
Q: You were telling us about the sell-off that we are seeing in the global markets. Do you expect that to continue and what could the quantum of the pullback look like?
A: The sell-off looks like a high data led sell-off. A sell-off that is in line with the data of the country or the asset class in question could be expected. So it will be less about bottom up, but a general pullback from risk in the kind of partial unwinding of some of the risk-on. Not a complete reversion to risk-off like in 2011 or much of 2012. It will be reduction in some of the risks which points, not to a catastrophe, but a meaningful correction.
Q: Do you see further levels or strengthening on the dollar index and what would your targets possibly be on gold?
A: We do expect gold to continue to trend down quite meaningfully over a period of time. The reality is that there is a strong dollar environment. I don’t want to say that the dollar can only go up no matter what happens, but if you think about the general tendency when times are good — the US is experiencing capital inflows and bit of an industrial and energy renaissance. That is good for the dollar. When times were bad, the dollar had been a funding currency and obviously still continues to offer the deepest, most liquid market. So when times are bad, people are going to shift into the dollar because risk trades funded in dollars are going to be unwound and people are going to see safety and liquidity in the dollar.
So I do think in a somewhat symmetric, good environment for the dollar and the US, relative to other countries because despite all its faults, it has done much better than most other countries in managing the crisis and the aftermath.