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, who’s head of market analysis at London-
basedcurrencybrokerSchneiderForeignExchange
Ltd. “Questioning the prevailing orthodoxy is what
firstgotmeinterestedinfinance,andit’swhatkeeps
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-
cieteGeneraleSA’sstrategistsplacedsecond,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. currency’s
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 dollar’s reserve status. By garth theunissen
Top Currency
Forecasters
STEPHEN GALLO
schneider foreign exchange,
head of market analysis
Gaugescurrencyflowsandtracks
indicatorstoidentify“dangerzones”
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
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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.
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3. strategies
rankings
As of Sept. 12, Gallo was predicting an end to
the dollar’s slide, at least through year-end. Even
so, he’s not bullish on the greenback, given the
Federal Reserve’s 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
world’s 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
pound–dollar and dollar–Swiss 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 master’s 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
energyonwhathecalls“gettingadecentgraspon
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 zones”—levels 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 region’s 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. That’s
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 DOLLAR–SWISS 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.
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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
world’s 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.
“It’s 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 2010’s
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 we’re not very optimistic
on the euro,” Serebriakov says.
192 bloomberg markets November 2011
rankings
Some investors aren’t convinced. They argue
that the U.S. has its own debt woes and say that
the August decision by Standard & Poor’s to re-
scind the country’s AAA credit rating may yet
hurt the dollar.
“I’m 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.3–ranked 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 EURO–SWISS FRANC FORECASTERS
Avg. margin of error
1 Bank of Tokyo–Mitsubishi 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 tokyo–mitsubishi 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
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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
bank’s 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 dollar’s status as the
world’s 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 bank’s loose monetary poli-
cies. “I’ve been a structural pound bear for as
long as I’ve 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.Italsodoesn’thurttorelyon
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
fargo’sserebriakovsays.
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