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- 1. 188 bloomberg markets November 2011 strategies judeedginton rankings Stephen Gallo, the most accurate currency forecaster in the six quarters ended on June 30, says he starts his analysis by challenging popular assumptions in the market. Always ques- tionthemajorityviewandthelazyconsensus,says Gallo, whos head of market analysis at London- basedcurrencybrokerSchneiderForeignExchange Ltd. Questioning the prevailing orthodoxy is what firstgotmeinterestedinfinance,anditswhatkeeps me interested today. Gallo, 29, tests the consensus by putting it up against a range of currency, economic and technical gauges he monitors daily and by speaking frequently with money managers, tradersandcentralbank officials to gain the broadest sense possible of the forces behind market moves. The strategy helped him earn the top spot among 50 currency forecasters tracked by Bloomberg Rankings. So- cieteGeneraleSAsstrategistsplacedsecond,while Wells Fargo & Co.s foreign-exchange team placed third.JPMorganChase&Co.sforecasterscamein fourth followed by the team at Credit Agricole SA. Gallo prevailed during a period when the U.S. dollar was weakening against its peers. In the year ended on June 30, the U.S. currencys value dropped 14 percent as measured by the U.S. Dollar Index, which tracks the greenback versus the currencies of six U.S. trading partners. Stephen Gallo of Schneider Foreign Exchange, No. 1 in a Bloomberg ranking, says euro-area woes will bolster the dollars reserve status. By garth theunissen Top Currency Forecasters STEPHEN GALLO schneider foreign exchange, head of market analysis Gaugescurrencyflowsandtracks indicatorstoidentifydangerzones ofover-orundervaluation. Says reserve status will support the dollar. Predicts further pound weakness amid accommodative monetary policy. best Overall Currency Forecasters Avg. margin of error 1 Schneider Foreign Exchange 5.05% 2 Societe Generale 5.21 3 Wells Fargo 5.50 4 JPMorgan Chase 5.61 5 Credit Agricole 5.65 6 National Australia Bank 5.75 7 Scotia Capital 5.91 8 HSBC Holdings 5.95 9 Commonwealth Bank of Australia 6.03 10 Rabobank 6.06 Margin of error was calculated by subtracting a forecast rate from the recorded one and then dividing the result by the recorded rate. Based on currency forecasts for the six quarters ended on June 30 and for the year ended on June 30. Source: Bloomberg focus 188 9/21/11 6:39 PM
- 2. Xxxxxx 2011 bloomberg markets 189 A FAILURE TO TACKLE THE STRUCTURAL FLAWS OF THE EURO WILL JEOPARDIZE ITS STATUS AS A CREDIBLE ALTERNATIVE TO THE DOLLAR, GALLO SAYS. 189 9/21/11 6:39 PM
- 3. strategies rankings As of Sept. 12, Gallo was predicting an end to the dollars slide, at least through year-end. Even so, hes not bullish on the greenback, given the Federal Reserves accommodative stance and record-low benchmark interest rate. Rather, he says, the debt crisis in Europe will put a floor on further dollar declines by dis- couraging investors from bet- ting too heavily against the worlds only viable reserve cur- rency. A failure to tackle the structural flaws of the euro will jeopardize its status as a cred- ible alternative to the dollar, Gallo says. He estimates that the dollar will trade at about $1.40 per euro at year-end ver- sus $1.3679 on Sept. 12. Currency forecasters were ranked according to the accuracy of their esti- mates for the six quarters beginning in January 2010. Long-term accuracy was judged using a forecast for the 12 months ended on June 30. Onlyfirmswithatleastfourforecastsforapartic- ular currency pair were ranked, and only those thatqualifiedinatleastfiveofeightpairswerein- cluded in the ranking of best overall predictors. In addition to placing first overall, Gallo was the most accurate euro-dollar forecaster and the fourth-most-accurate predictor of the British pounddollar and dollarSwiss franc pairs dur- ing the ranking period. A native of New Jersey and graduate of Providence College in Rhode Is- land, he joined Schneider in early 2006 after earning a masters degree in investment manage- ment from Cass Business School in London. Working at a small upstart that lacks proprietary indexes for measuring currency val- uation,momentumandreturns,Gallofocuseshis energyonwhathecallsgettingadecentgraspon the flows in foreign-exchange markets. He does that mainly through his daily conversations with market participants such as traders and hedge- fund managers, as well as central bank officials. Gallo then combines that market intelligence with analysis of data such as balance of payments figures, economic growth rates, inflation differ- entials and forward-rate expectations. He also uses technical-charting techniques and tracks measures of purchasing-power parity to identify what he calls danger zoneslevels of over- or undervaluation in a currency that suggest a devi- ation from fundamentals. In line with Gallo, the majority of the top 10 forecasters in the Bloomberg ranking predictthatthedollarwillholditsgroundagainst the euro through the end of the year. Leaders from the euro area are struggling to find a solution to the regions sovereign-debt crisis, with the European Central Bank forced to resume purchases of indebted member-coun- try bonds in early August to prevent speculators from driving up their borrowing costs. Thats 190 bloomberg markets November 2011 Best Euro-Dollar Forecasters Avg. margin of error 1 Schneider Foreign Exchange 5.85% 2 National Bank Financial 6.12 3 X-Trade Brokers Dom Maklerski 6.14 4 MPS Capital Services Banca per le Imprese 6.36 5 Central European International Bank 6.41 BEST EURO-YEN FORECASTERS Avg. margin of error 1 Westpac Banking 2.91% 2 Credit Agricole 3.08 3 Wells Fargo 3.69 4 Rabobank 3.81 5 Sumitomo Trust & Banking* 4.37 Best Euro-Pound Forecasters Avg. margin of error 1 Australia&NewZealandBankingGroup 2.42% 2 Societe Generale 3.03 3 National Australia Bank 3.07 4 UBS 3.14 5 Landesbank Baden-Wuerttemberg 3.19 BEST DOLLARSWISS FRANC FORECASTERS Avg. margin of error 1 Societe Generale 6.22% 2 HSBC Holdings 6.35 3 Nordea Bank 6.40 4 Schneider Foreign Exchange 6.48 5 Commonwealth Bank of Australia 6.66 Margin of error was calculated by subtracting a forecast rate from the recorded one and then dividing the result by the recorded rate. Based on currency forecasts for the six quarters ended on June 30 and for the year ended on June 30. *Became part of Sumitomo Mitsui Trust Holdings in March. Source: Bloomberg negative on the dollar Kit Juckes of second-ranked Societe Generale says low U.S. rates will hold down the dollar. focus 190 9/21/11 6:39 PM
- 4. strategies prompted investors to reduce bets on a dol- lar collapse even as U.S. President Barack Obama and lawmakers grapple with how to reduce the fiscal debt burden of the worlds biggest economy. In mid-September, the ECB said it would coordinate with the Fed and other central banks to ensure euro-area banks had enough dollars. Its difficult for the dollar to fall out of bed, says Paul Mackel, 38, director of cur- rency strategy in Hong Kong at HSBC Holdings Plc, the eighth-most-accurate forecaster in the ranking. The euro-zone crisis has definitely slowed the pace of dollar weakness. Wells Fargo estimates that the dollar will trade at $1.32 per euro by the end of 2011, ac- cording to forecasts made as of mid-September. JPMorgan sees the dollar at $1.45, while Credit Agricole predicts a rate of $1.37 per euro. HSBC sees the dollar ending the year at $1.44 per euro. The dollar has its problems, but the euro- zone debt crisis is not about to end, says Vassili Serebriakov, a currency strategist in New York at Wells Fargo, which ranked third overall in 2010s ranking and was the only firm to place in the top five two years in a row. Serebriakov, 34, assists head strategist Nick Bennenbroek, 40, in making forecasts for Wells Fargo. The interest rate and growth outlook for the region are also deterio- rating, and that means were not very optimistic on the euro, Serebriakov says. 192 bloomberg markets November 2011 rankings Some investors arent convinced. They argue that the U.S. has its own debt woes and say that the August decision by Standard & Poors to re- scind the countrys AAA credit rating may yet hurt the dollar. Im negative on the dollar, says Kit Juckes, London-based head of foreign- exchange research at Societe Generale, the sec- ond-most-accurate forecaster. The U.S. favors a weaker currency as part of its economic solu- tion, and with employment well below where they want it to be, the Fed Reserve will keep rates lower for longer. As of Sept. 12, SocGen estimated that the dollar will trade at $1.45 per euro by year-end. Juckes, whoturns50onNov.3,saystheU.S.currencywill europessimists NickBennenbroek, left, and VassiliSerebriakov of No.3ranked Wells Fargo say the euro faces challenges amid a deteriorating outlook for economic growth. BEST DOLLAR-YEN FORECASTERS Avg. margin of error 1 MPS Capital Services Banca per le Imprese 2.98% 2 Royal Bank of Canada 4.24 3 Societe Generale 4.32 4 Canadian Imperial Bank of Commerce 5.17 5 Standard Bank Group 5.30 BEST POUND-DOLLAR FORECASTERS Avg. margin of error 1 National Bank Financial 2.85% 2 Paradigm Wealth Management 2.96 3 Vadilal Enterprises 3.55 4 Schneider Foreign Exchange 3.62 5 Scotia Capital 3.77 BEST EUROSWISS FRANC FORECASTERS Avg. margin of error 1 Bank of TokyoMitsubishi UFJ 4.00% 2 Bank of America Merrill Lynch 4.18 3 BNP Paribas 4.28 4 JPMorgan Chase 4.31 5 ING Financial Markets 4.50 BEST DOLLAR-yuan FORECASTERS Avg. margin of error 1 Commonwealth Bank of Australia 0.44% 2 Wells Fargo 0.62 3 Australia & New Zealand Banking Group 0.70 4 bank of tokyomitsubishi ufj 0.71 5 Standard Chartered 0.76 Margin of error was calculated by subtracting a forecast rate from the recorded one and then dividing the result by the recorded rate. Based on currency forecasts for the six quarters ended on June 30 and for the year ended on June 30. Source: Bloomberg focus 192 9/21/11 6:39 PM
- 5. strategies likelyweakenfromthere,reaching$1.50pereuro in the first quarter of 2012. Fed Chairman Ben S. Bernanke made an un- precedented pledge on Aug. 9 to keep the central banks target interest rate for overnight loans be- tween banks in a range of zero to 0.25 percent until mid-2013 to support the economy. Yields on benchmark 10-year Treasuries have since plunged to record lows, touching 1.8770 percent on Sept. 12. The allure of Treasuries as a haven during times of economic crisis, along with concern that the euro-area debt crisis is spreading, are likely to maintain the dollars status as the worlds only viable reserve cur- rency, says Adam Myers, a senior foreign-exchange strategist at Credit 194 bloomberg markets November 2011 To identify the most accurate foreign-exchange forecasters for the six quarters ended on June 30, we used the Foreign Exchange Forecasts (FXFC) function along with Bloomberg indexes that track historical forecasts for various firms. Type FXFC <Go> and click on Euro, for instance, to view estimates for the euro-dollar pair. We looked at estimates made for the first quarter of 2010 through the second quarter of 2011. To test long- term accuracy, we added one annual prediction, which was made at the end of June 2010 for June 30, 2011, exchange rates. Each of the seven forecasts was weighted equally. Our rankings show the top five forecasters for each major currency pair listed by their average margin of error, which was calculated by subtracting the estimate from the actual spot rate and dividing the result by the actual spot rate. To qualify for each currency-pair ranking, a firm had to submit at least four forecasts. In order to be included in the overall currency forecaster ranking, firms had to be eligible for consideration in at least five of eight currency pairs. In all, 50 firms submitted enough forecasts to be ranked in at least one currency. For more Bloomberg Rankings stories, type BBRANK <Go>. Bloomberg rankings rankings@bloomberg.net Agricole Corporate & Investment Bank in Lon- don. We expect the situation in Europe to de- teriorate, and with the Fed pledging to keep providing stimulus to the economy, the dollar will benefit, Myers, 36, says. U.S. Treasuries are still seen as the ultimate safe haven. As for the British currency, which gained 1.6 percent against the dollar and de- clined 0.6 percent versus the euro in 2011 through Sept. 12, Gallo predicts weakness ow- ing to the central banks loose monetary poli- cies. Ive been a structural pound bear for as long as Ive been in the business, says Gallo, who estimates that the British currency will end the year at $1.59, flat from where it was on Sept. 12. Sterling is going to be permanently weak as long as the Bank of England continues to print money. For Gallo, an amateur pilot who flew his first solo flight at age 16 in a Piper J-3 Cub, putting the consensus to the test is a good place to start when analyzingcurrencies.Italsodoesnthurttorelyon yourgutinstinctssometimes,hesays. I use a certain amount of intuition rather than just being debilitat- ingly quantitative, he says. GARTH THEUNISSEN COVERS GOVERNMENT BONDS AND FOREIGN EXCHANGE AT BLOOMBERG NEWS IN LONDON. GTHEUNISSEN@BLOOMBERG.NET rankings TIP BOX Type xdsh <Go> to monitor a variety of foreign-exchange data. How We Crunched the Numbers Thedollarhasitsproblems, buttheeuro-zonedebtcrisis isnotabouttoend,wells fargosserebriakovsays. focus 194 9/21/11 6:39 PM