'I forecast EURUSD to end the year just above $1.0800' - Christopher Vecchio, DailyFX

Christopher
Vecchio

PROFILE:
• Current Job:  Currency Analyst for DailyFX.com in New York.
• Career: dual Bachelor of Arts degree in Government & Law and Economics from Lafayette College.

View profile at FXStreet

Christopher Vecchio is a currency analyst for DailyFX.com. With a background in political science and law, he focuses on the interrelationships between geopolitical events, macroeconomic trends, and market reactions. Also an active trader, Christopher monitors the markets around the clock.

Do you see the EUR/USD going to parity in 2015? Following the ECB announcement, what is your forecast for the Euro in the coming months?

Parity seems like a ‘castle in the sky’ idea that everyone get behind, but now that the ECB has unleashed its first iteration of QE, we need to step back and take stock of what’s happened: we’re on pace for the first -6% month since September 2011. While the monthly closing low in September held up for two months, the rally was nothing more than a pause (profit taking) rather than the sign of a turn. If anything, drawing from history, now that we’ve gotten the official announcement, EURUSD may be vulnerable to speculators easing off the gas pedal. I forecast EURUSD to end the year just above $1.0800 as it stands. In the interim, the bearish bias is intact so long as price does not breach $1.1680 on a weekly closing basis.

Did the ECB go far enough in its decision (Thursday)? Will it be enough to create the desired monetary shock? Is the ECB targeting the right maturities/assets? Should non-investment grade debt be included in the purchases?

‘Disappointment’ is a phrase you’ve probably heard associated with the ECB in recent months, as market participants have been left disappointed by the lack of substantive policy decisions undertaken to fight the region’s low growth, disinflationary rut. Yet yesterday, despite all of the hoopla around the ECB for the past six-weeks, President Mario Draghi delivered.

Going into the event, the hype was undoubtedly high: the European Court of Justice cleared the way for QE with its decision last week; the Swiss National Bank’s decision to abruptly remove the EURCHF floor ahead of an expected ECB QE announcement; the ECB’s balance sheet being relatively unchanged for two months; and inflation expectations plummeting to fresh multi-year lows.

There was a fairly high bar established for disappointment as well, thanks to Wednesday’s ‘leak’ that clued traders into the size of the program: €50bn/month through the end of 2016 – roughly a €1.1 trillion balance sheet expansion. The exact measures taken on Thursday, suffice to say, have lived up to the hype and cleared Wednesday’s hurdle. The ECB’s decision to announce a €60bn/month program through September 2016 not only means that the ECB will be inflating its balance sheet faster than expected, it will also be increasing the balance sheet beyond the expected aggregate total rumored mid-week.

In doing so, the ECB has given itself significant room to operate laterally within the program; the program is open-ended, allowing the ECB to push back the end date as it deems necessary – keeping the market on the hook, hoping for more QE.

What, in your opinion, is the EUR/CHF fair value?

I don’t think there is one. The undoing of the peg opens the door for more significant price discovery to occur, and given the increased probability of heightened volatility. Gun to my head, I’d rather intraday trade CHF-pairs than attempt to figure out a long-term fair value. I don’t think that the Swiss National Bank is done meddling, particularly if the ECB’s recent actions don’t produce the desired results over the course of 2015.

Has the AUD/USD bottomed at 0.8030?

The breakdown through the yearly opening range exposes targets lower over the coming three- to six-months. Targets eyed come in the form of the 2007 low at 0.7673 and 0.7200, the approximate location of the 2001-2008 low trendline in July 2015.

Is it looking more and more likely that any Fed tightening will be kicked into next year?

Right now the Fed funds rate is suggesting a December 2015 rate hike. Overnight index swaps are pointing to October or November. It’s interesting that, despite the fall in rate hike expectations, the US Dollar has been able to maintain its levity. I’m partial to the belief that, given the composition of the FOMC, the “lower for longer” approach will prevail. That being said, considering how the Fed has made it clear that it would prefer not to embark on another QE program, that the Fed may move to raise interest rates sooner so that if global growth stalls out and the US economy is pulled down too, they will be able to cut rates in the face of a recession. If I were a policymaker, I would be very hesitant to raise rates right now. Central bank credibility is on the rocks after the SNB’s move last week, and the worst thing that could happen would be if the Fed pulls a Jean-Claude Trichet – the ECB raised rates in July 2011 only to cut them thereafter, eroding the market’s faith in the ECB to effectively implement policy, an explicitly negative development for the Euro-Zone crisis.