'ECB and BoE not desperate, but believing more is need to stabilize financial systems' - John Kicklighter, DailyFX

   John
Kicklighter

PROFILE:
• Current Job:  Senior Currency Strategist for FXCM in New York.
• Career: Graduated from the Zicklin School of Business with a Bachelors degree in Finance and Investment. Specialized in combining fundamental and technical analysis with money management.

View profile at FXstreet.com

John Kicklighter is the senior currency strategist for FXCM in New York where he specializes in combining fundamental and technical analysis with money management. John authors a number of regular articles for DailyFX.com, ranging in topics from basic fundamental forecasts for the G10 economies and commodities to more complex subjects like the level of risk sentiment across the financial markets and the carry trade specifically.

John has actively traded since he was a teenager. His experience ranges from spot currency, financial futures, commodities, stocks, and options on all of these instruments for his personal accounts. John graduated from the Zicklin School of Business at Baruch College in New York with a Bachelors degree in Finance and Investment.

Is the ECB and the BoE's decision to introduce forward guidance last week a sign of desperation, indicating that the central banks are running out of ammunition?

The decision by the ECB and BoE to introduce forward guidance isn’t necessarily a sign of desperation, but it does reflect their belief that more is needed from the central banks to stabilize their respective financial systems. For the European Central Bank, the option to significantly upgrade its effort is there –change the terms for activating the OMT program and/or taking on a new open-ended program such as one targeting loans to small and medium-size businesses (SMEs). Having seen the path that the Fed and BoJ have taken, though, a central bank doesn’t want to have to escalate the situation to that scale. As for the Bank of England, the shift to offering the market more insight into its policy decision was long overdue. The lack of transparency from the group after meetings that didn’t result in material policy change contributed to greater volatility. The BoE too has a lot of room to expand its stimulus effort but not yet the will to match it.

Will Greece be able to implement all the reforms required by the Troika in time to receive the entire 8.1 billion aid payment, split into two tranches by the Eurogroup on Monday? What are the biggest obstacles?

The tranches were adopted so that Greece can hit smaller, easier targets. However, just because the situation is easier, doesn’t mean that the country can necessarily hit those targets with ease. The first round of aid €2.5 billion needs to be secured with progress by July 19. Given the trouble with privatization and trimming public payrolls in recent months, it is still exceptionally difficult to hit the deadline. That said, the problem is not likely to come from the first milestone, but subsequent payments. Social discontent with long-term recession and commitment to austerity grows by the day. At a certain point, the government may lose the will of the people to keep the focus on the Eurozone objectives.

Has the political situation in Portugal stabilized sufficiently in your opinion, following the cabinet reshuffle over the weekend? Will the government press for relaxing bailout conditions further?

The situation with Portugal’s government is far from sound. Prime Minister Coelho barely avoided an early election call with the last minute appointment of his former Foreign Minister to the position of Deputy Prime Minister. This brings issues of its own. An opponent of austerity, Mr Portas has been given the responsibility of negotiating the country’s position with the Troika. He hardly seems the person you would want if you were looking for the situation to be settled smoothly and keep the course. He is almost certainly going to ask for relaxed conditions, and policy makers on the opposite side of the table are unlikely to push back given the sensitivity of the situation.

With the AUD/USD in lows since August 2010 and commercial hedges going long but 'smart money selling at this levels, do you see a significant bounce from the 0.9000 area? Any target in the 1 and 3 month windows?

The recent Commitment of Traders report from the CFTC showed that speculators were holding the largest short Aussie dollar position via futures on record. Many consider that a contrarian reading, but again there has been a considerable crowd pointing out that this is a reversal sign week after week for a few months. Not only has the greenback maintained its drive, but the Aussie dollar has switched from risk aversion to expected RBA rate cuts to the repatriation of capital from the newly minted reserve currency whenever the market seemed ready to spot a silver lining. The problem with a long Aussie trade – much less AUDUSD – is that it is difficult to see a robust appetite for carry, a shift in monetary policy or renewed appetite to diversify out of USD as financial stability concerns grow. A break above 0.9250 would be a good first step for a AUDUSD turn higher, but seeing it advance much higher than 0.9500 to 0.9750 in the coming months would require a very significant change in backdrop investment conditions.

EUR/USD has managed to bounce from the 1.2800 area several times over the last few months; Do you believe it's a floor, or latest data from both economies suggest is time for a change?

The 1.2800 level for EURUSD is far from a convincing floor. We have already slipped below the trendline support that was in that area and have moved on to the March swing low 50 pips lower. We are unlikely to see the market respect hard levels in current conditions. With a propensity for volatility and a positive correlation between risk trends and the US dollar, we could still see EURUSD drop even as other risk benchmarks like global equities rise. If that were the scenario, we would see EURUSD dribble lower; but a lack of true drive for directing capital to safety would keep the pair from generating the kind of momentum retail traders usually look for. Unless genuine risk aversion kicks in, it is going to be difficult to generate meaningful drive in the FX and capital markets.