'Expect EURUSD to drop below 1.05 before the end of the year' - John Kicklighter, DailyFX

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

View profile at FXStreet

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.

Fed did hold rates, but Draghi keeps talking the euro down. What's your forecast on the EURUSD?

While the Fed did hold rates at its last meeting, most members still believe the central bank will realize liftoff before the end of the year. That is an outlook that the market is not accounting for. On the Euro’s side, an upgrade in QE seems a direct foil, but amplifying a program that still has 12 months of life would require a significant market event. I expect the EURUSD will drop find its way below 1.05 before the end of the year, but it will likely come from an event like market-wide risk aversion that in turn exacerbates their monetary policy differences as well as their divergent haven status.

Do you expect the Fed to hike rates before this year ends?

I do believe the Fed will hike rates before the year is out. In the last forecast, 13 of the 17 FOMC members expected a hike was appropriate in 2015; and Chairwoman Janet Yellen remarked this week that she is part of that group. The market has grown understandably skeptical of the central bank’s views as they have consistently been revised, but that creates a sense of complacency that can be profoundly market moving.

Are the emerging markets solid enough to sustain a tightening of the monetary policy by the Fed?

Emerging Markets have already slid substantially. As a high-return, risk-oriented asset class; we have actually seen this group diverge from the epic climb in US and developed world equities around 2011. There are frequent references to the ‘Taper Tantrum’ which saw a drop in Emerging Markets on fears that the Fed would pump the breaks on QE3. What we have seen recently though has easily outpaced the capital flight we saw back then. While the drop has been significant, it has also bled considerable excess premium from the region. That is not to say it isn’t still overvalued, but it certainly isn’t a bubble ready to burst either.

China keeps posting worrying macroeconomic numbers. Can the commodity prices stop their downtrend with the chinese demand shrinking?

China is the world’s largest single consumer of many important commodities, and their economic slowdown certainly keeps a demand-related pressure on the prices of these natural resources. The Asian behemoth is seeing its economy cool faster than anticipated, but even if its flight plane were exactly in-line, the leadership has committed to a transition away from past decades of a strictly manufacturing-led growth plan. That said, it is certainly possible that other consumers of resources recovery and compensate for China’s absence. What’s more, supply has adjusted on important commodities such as the petroleum group which have powerful groups that can further adjust the equilibrium should they decide to.

Is the JPY the top currency to buy if looking for a safe-haven?

The Japanese Yen is not a safe haven currency in traditional terms. If the global financial market is on fire, fund managers don’t scramble for JGBs. In a liquidity crunch, the time-honored US Treasury debt is the beacon through sheer panic. Should we hit the extremes in instability that were present during the worst of the Great Financial Crisis, the Dollar will draw funds from all over. However, short of that extreme fear, there will be an effort to deleverage existing ‘risk’ positions. Just like investors would first sell shares before moving cash to some other asset, FX traders would first deleverage carry trades. After three-years of BoJ fueled gains while yields shrunk, there is plenty of unwinding in Yen crosses to be done that would place a bid for the Yen through the various phases of risk aversion.