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After four good years there’s this feeling that it may be time for an economic correction
Mayank Singh

David Bloom, global head of foreign exchange strategy, HSBC, is a familiar figure across the Middle East. His annual presentations on global economic trends and currency forecasts over the last six years have become an authoritative treatise on what lies ahead. In a tete-a-tete with Business Today he shares his thoughts on the rationale and benefits of currency forecasts, the economic outlook for the year ahead and more.

What is the underlining reason and benefits for doing currency forecasts?
It is not exactly a forecast but an indication of what the direction is and where the risks lie. And that is important for both corporate clients and institutional clients, as they have to decide whether to hedge or to take a risk. We would never encourage anybody to take speculative risks in foreign exchange and so one of the duties of the bank is to inform so that customers can protect themselves against any adverse movement in the foreign exchange market. We do not want customers to be foreign exchange traders and banks have instruments to protect customers against such disasters.

How accurate are currency forecasts? Is there a margin of error that you factor in?
My forecasts are very accurate (laughs). There are different interpretations of the accuracy of currency forecasts. Theoretically, people argue that it is unpredictable but tell me, a few years back did anyone guess that oil prices would be where they are today? The answer is no one.

The future is not entirely predictable and it is no different for equities, currencies, bonds, eco-nomies or oil prices. All of them are the same and there are risks inherent in all of them. If you look at the underlining volatility, the difference is that we are unbiased in the foreign exchange market, compared to, say, equity analysts who have an inherent interest when they say that the markets are going to go up every year.

In contrast, we sometimes say that the dollar will go up and sometimes we say that the dollar will go down. I do not have to get people to buy or sell the dollar. HSBC does not make more or less money if customers do either of these. Whereas, in equities and bonds an analyst makes more money when people buy.

Why is this information not classified for your clients and shared with everyone?
Both our clients and we recognise that there is a host of views on the issue and clients want to know different views. If I knew the exact answer, not only would I not be sharing it with everyone, I would also certainly not be sitting here and talking to you.

I do not have a monopoly on the truth and we have to accept that. Hopefully I would be more right than wrong. But at the end of the day it is about the underlying arguments, the underlying views behind the numbers that have relevance for clients. They make their own decisions based on the best information that they have. And we want our clients to have the best information. We want clients to have our view and we do not get upset if they have someone else's view because that's what makes a market.

Was there always a demand for currency forecasts or did HSBC evolve the model and it caught on?
That’s an interesting question. There is defini-tely a demand from clients. At times customers want us to forecast trends till 2010 and we find that strange. At HSBC we believe that if you are making shoes then our job is to help you in the shoe making business and we do not want you to be a currency speculator. We do not want corporate clients speculating, otherwise we are offering them job as a currency speculator. And you have to realise that if you do nothing, then you are a currency speculator.

You have been coming to the Middle East over the last six years. Have clients in the region become more informed about currency forecasts?
I have been doing currency forecasts for seven years now and I have been in the financial markets since 1992. There is no doubt that people in the region have become much more sophisticated. The kind of instruments being used for hedging risks, the understanding of economics and the sophistication of clients – all these have improved significantly over the last few years.

When we went to companies some five or six years ago we found one person doing everything, now we see a team of specialists handling different functional areas. My presentations too have changed. Earlier I would be showing plain GDP forecasts, industrial production figures and it was much more basic. The ideas have become sophisticated now. The presentation that I do in Oman now is the same as the one I would be doing in Singapore or anywhere else in the world.

What is your take on the economic outlook for 2006-07?
We have had four years of very strong global growth. Not only have commodity prices gone up, it has in turn helped commodity producers and emerging markets. Moreover, the West (US and Europe) has been able to cope with this and it has been fantastic. We are now questioning whether the good times are coming to an end. In the last few years the stock market did well, the Federal Reserve cut interest rates aggressively, consumers took on a lot of debt and the housing market went up.

Everything looked great. Now the housing market has started slowing down in the US and this is a worry. The moot question is what impact will a slowing housing market have on commodity prices and the overall economy. We are not calling it a recession but we are warning people that there is a possibility of a slow down in economic growth. We are presenting various scenarios like we might have a mild US slowdown, or the US could slow down drastically, putting commodity prices under pressure. If such a thing does happen, and oil prices remain high, then the Federal Reserve will have to cut interest rates aggressively which will lead to the dollar coming down.