In this video blog Udi Sela, VP of Business Development at Numerix discusses his thoughts on the potential for future rate hikes by the Fed and impact on Fed Funds Futures pricing. Mr. Sela also addresses how the recovery in commodities markets are playing a role in the new rate environment and what trends he’s seeing in terms of global FX trends and strategies.
Jim Jockle (Host): Hi, welcome to Numerix video blog, I'm your host Jim Jockle. Continuing on our series on the current interest rate environment, let’s turn to the other side of rates that continue to be poised to rise and with that let’s take a look at the US. Joining me today is Vice President of Business Development here at Numerix, Udi Sela. Udi, thank you for joining us.
Udi Sela (Guest): Thank you, Jim, for having me.
Jockle: So, we’re now a couple of months after the first rate hike and there is clearly some conversation about rates continuing to rise here in the US over the next couple of months, but the question I want to start with you is, what are you starting to see in the Fed Funds Future market?
Sela: So, it was actually very interesting at the beginning of the year, because during the first three months, we saw weakening of the equity market. As a result at some point the Fed Funds futures market was implying zero rate hikes during 2016. So just as a reference, within the Euroland basically the equivalent context implies rate hikes like only 50 months from now. And recently, what we are seeing what the fed funds have implied, is the probability like 63% for one rate hike at least this year. And when we listen to some Fed Officials, we’ve started to see over the last few weeks they have begun preparing the market actually for up to two hikes this year. What we’ve seen in fact was the Fed Officials are trying to prepare the market for the new rate environment. This is a very different response to the European Central Bank which does surprise the market from time-to-time.
Jockle: With that 65% probability that’s coming out of the Fed Fund Future, any indication as to how much? I think we saw 25 Bps. Is it your expectation that we’re going to continue to see a slow measured movement upward?
Sela: Absolutely. I think that will go to 25 basis points each. Probably my guess would be June and December. I think that every time the Fed would want to measure the impact of rate hikes on the US inflation. At the same time we also see there is a recovery in commodity prices. If WTI has traded as low as $27 a barrel and is hovering around $40. So that’s another reason to think inflation can start picking up again. Yeah, and I think the Fed is doing a tremendous job in preparing the market.
Jockle: So in terms of focusing now on FX and FX strategies. You know, your wheelhouse. We’ve got, God can’t even count anymore on how many counties have gone negative. You’ve got a rising US. If we look at Latin America, we’ve got tons of high rates in Brazil and things of that nature. From an FX perspective, what are you thinking about when you’re looking at the markets and what are you seeing in terms of derivatives strategies?
Sela: Ok, first of all in terms of trends, you mentioned the emerging markets. I just mentioned a few minutes ago, the recovery of commodity prices. This is having a positive impact on commodity currencies such as the Canadian dollar, like the Australian dollar, even in South Africa which the Rand was heavily hit. And therefore we see some kind of a recovery, the same time the US dollar weakening following the “Bazooka” announcement quote un-quote announcement of the European Central Bank. Actually, the US dollar has weakened a bit, so this is also helping emerging market currencies to recover. And, given that the pace of rate hikes in the US will be moderate, the interest rate differential between the US Dollar and other G7 currencies will not be as significant. I also think the Fed is concerned with additional strengthening of the dollar, because again it will slow inflation and it will hamper the effort to stimulate the US economy. So I think it is a very balanced game. On that note, as you mentioned the Brazilian Real, it is actually experiencing quite a bit of a recovery because the Brazilian president could be impeached. Normally you would think a currency should weaken under such circumstances, but in Brazil, the case is just the opposite.
Jockle: So Udi, final question for you. Taking a little bit of a longer-term view, by long term I mean three whole months from now- what’s on the watch list? Is it oil? Is it gold? Is it commodities in general? Is it rates? What’s keeping you up at night?
Sela: I think the next interesting thing that would happen in the market revolves around the UK about the Brexit. So I think that we’ve seen the British pound has weakened a bit against the dollar and against the Euro and I think this will have a major impact. And also given them the sad, tragic events in Europe recently, I think that if Britain would leave the European Union other countries will follow the same path through and I think this is the biggest risk in terms of what will happen to the Eurozone; ultimately the impact could be massive.
Jockle: Well clearly we’re going to keep all eyes on that and Udi as events continue to unfold we’re obviously going to want to talk to you and get your opinions again and we always appreciate your insights so thank you so much for joining us, Udi. We always want to talk about the things that you want to talk about so please chat back us on Twitter @nxanalytics and stay up to date on everything that is Numerix on LinkedIn and at numerix.com. I’m your host, Jim Jockle, thank you for joining.