Fed's move not surprising; USD to be under pressure: Pros

Nicholas Ferres, Eastspring Investments is not surprised with Fed’s dovish outlook. In an interview to CNBC-TV18, he said that Fed was not only worried about the labour market, but also about rising bond yields and the strength of US dollar.

Meanwhile, Jonathan Barratt, Barrattsbulletin.Com is of the view that continuing the stimulus would put pressure on the green back and by default lot of commodities would trade higher. Also read: Fed surprises, sticks to stimulus as it cuts growth outlook  Below is the verbatim transcript of their interview on CNBC-TV18 Q: How are you reading the Federal Reserves (Fed) actions, may be some temporary relief in the near term but on the whole is the US economy looking nervous? Ferres: The surprise for most people was that the Fed didn’t reduce the asset purchase program at all. But from my perspective it probably suggests or it clearly highlights that the Fed is worried about the strength in the labour market. It is also worried about the tightening in financial conditions like the rising yields in the bond market which has affected mortgage rates, and also the strength of the dollar over the last few months. So I wasn’t surprised that it was dovish, it was just clearly more dovish than what most people expected. Q: Were you also taken by surprise with this call not to taper and in the commodity space what is the upside that you are seeing now for crude as well as gold? Barratt: We weren’t surprised. The message that Bernanke sent to us in previous occasions and also last night was that the economy wasn’t strong enough and you cannot take that stimulus away from the market at the moment. However, the interesting thing is that the printing is going to continue so how that affects commodities is more based on what the US dollar is doing. The US dollar certainly is under a lot of pressure and by default we are seeing a lot of the commodity start to trade higher. Whether or not it is real or not is another question. We still feel that the economy has not engaged itself yet so there is potential for a bubble in certain asset classes to continue to fall. Q: We are seeing that the dollar has weakened to near seven-month low, what does it mean for emerging market (EM) currencies like ours? Barratt: This is one of the concerns that we have to focus on. Obviously we are seeing that currency crisis actually still be averted. I still think that the US dollar in itself will remain quite considerably weak. Now it has actually broken a trend that it has been with us for some time - it is August 2011 that trend for the US dollar to trade higher has been with us. So, with that breaking, we are going to see the US dollar under a quite considerable pressure and let us say how the EM currencies play out. But I think it is an issue that is certainly in the market at the moment. Q: The big question now is that when does this tapering come in, do you think that the December policy is the time when we could see and will it then be a taper light or do you think we could then begin to feel the entire blow of tapering? Ferres: I absolutely have no idea. It depends on the evolution of the labour market. One of the interesting points is that probably with this decision overnight is that the Fed might weaken this long-term credibility and weaken the credibility of the US dollar as well. They probably too are interesting takeaways. I do not have a strong view on when or if it might happen but it really depend on the labour market becoming stronger and the general macro newsflow on growth improving in the US. Q: Crude is sitting around USD 111 per bbl odd; bold as well has bounced back up to USD 1,360 per ounce odd. Those are worrying signs of the Indian economy but where do you see resistance on gold as well as on crude? Barratt: It was quite interesting on the gold market because last night I was looking when Bernanke’s started his speech but when the announcement came out, we saw very quick moves, USD 10-15 every couple of minutes. It seemed to me that the market was very short gold and there was quite a ferocious move but I actually it trading through USD 1,400 per ounce back up to USD 1,425 per ounce, depending on how the dollar trades. If the dollar continues to weaken, may support the gold price. Crude too was quite interesting and this is the way we want to see the economies engage because we still feel there is an oversupply in crude. The market for crude has been exceptionally weak over the last couple of weeks and this is just a rally that probably will be sold into. On Brent if we get back to USD 112-115 per bbl, I think it is the top because I do not see any reason for it to be up here other than the result of the weak dollar. This rally is something that I would be happy to sell into.