Fed may give hints of a rate cut in September; significant shift seen in carry trades: Mitul Kotecha

Mitul Kotecha, Head of FX & EM Macro Strategy, Asia, Barclays, says polls have been shifting since the stepping down of Joe Biden from running for the US presidential elections. So, there is a lot to play for here. But one of the big things being seen in markets is a reversal of some of the carry trades, a big selloff in risk assets and a carry unwind that is having a big impact on some of the higher-yielding markets in Asian currencies and benefiting some of the low yielders.

How are you looking at the potential outcome of Wednesday's US Fed meeting? Expectations are that the Fed could hold rates steady.
Mitul Kotecha: That is right. The Fed is unlikely to make a move on policy rates at this week's meeting. While there is evidence that the US economy is slowing and disinflation is proceeding, it is unlikely the Fed has evidence to cut rates. We still believe the Fed will cut in September and then cut again in December, followed by free rate cuts next year. The Fed may have opened the door to a September cut without explicitly saying so. There may be some indications from the Fed statement this week that they will be open to rate cuts as long as inflation continues to move in the right direction.

How are the markets reading into the political landscape now as it is going to be Kamala Harris versus Trump.
Mitul Kotecha: Well, that is right. We have had a lot of political gyrations in the US and markets have reacted very sharply to these as well and we have seen some very significant dollar moves and US rates moves. It is still a very open race and we have several weeks before the elections take place and in that sense, it is still too early to give a strong indication of what to expect. If there is a Trump 2 administration, the risk of higher tariffs is that much more and we believe higher tariffs globally and the US isolationism especially tariffs on China could disrupt global trade.


It could also mean a stronger dollar and at the same time, the risks of a fiscal deficit widening or even higher as well, which means we could see pressure on US bonds. But for now, markets are still pondering the implications. As you mentioned, we may have a Harris, Trump ticket there. It could take some time for markets to ascertain which way this goes. The polls have been shifting since the stepping down of Biden from running for the next election. So, there is a lot to play for here. But one of the big things we are seeing in markets is a reversal of some of the carry trades, a big selloff in risk assets and a carry unwind that is having a big impact on some of the higher yielding markets in Asian currencies and benefiting some of the low yielders.

How are you looking at the overall sentiment shaping up for the global markets? Are there any concerns?
Mitul Kotecha: There are concerns. We just talked about one of them. It is the US political picture. There are geopolitical tensions globally. Risk aversion has picked up and we have seen a big sell-off in some heavyweight tech companies in recent weeks and that has certainly resulted in higher equity volatility. The stock rotation seems to be intensifying.

On the other side of that, bond yields in the US have eased, and that provides some relief. But it is still a tough environment. Investors are taking money off the table as we go through the summer weeks and we have seen that in particular in the last couple of weeks where carry trades have been taken off very strongly.

The Indian rupee, for instance, has been a favourite carry trade for Asia currencies and we have seen some weakening pressure on the rupee more recently, again, has been caught up in this unwind. It looks like we may be in for a bit of a volatile period in the next few weeks where we are still trying to get a good picture of what is happening on the US elections and the political picture, what is happening on the growth front, when and if the Fed cuts next. There is a lot of uncertainty still in the market.