'I don't expect Fed rate hike in 2015, risk aversion might pick up' - Nenad Kerkez, Admiral Markets

NENAD KERKEZ
PROFILE
• Current Job: Analyst and Full Time Trader at Admiral Markets
• Career: Holds a MSc Degree in Economics at the John Naisbitt University (formerly known as Megatrend). Works as Head lecturer and analysis for Admiral Markets

View profile at FXStreet

Nenad Kerkez is an analyst and trader who has been in the market since 2008 and works closely with Admiral Markets as their Head Lecturer and Market Analyst. He is well known in the FX Community, ranking in the top 10 traders and analysts in the Forex Factory High Impact Members Ranking.

Nenad covers over 25 currencies on an intraday basis and has a Masters in economics. He also developed CAMMACD TM, a proprietary trading and analysis strategy. Further, he is the co-founder and head of Elite Currensea Trading, an educational website for currency traders.

Did disappointing October US Payrolls report kill the possibility of a Fed rate hike for this year?

I warned about it. Had a lot of tweets in last 3 months about no rate hike and possible QE4 (!) which is also a valid theory. My guess is no rate hike next quarter. If stock markets continue going south, FED will start talking about QE4. If the stock market crashes then they go back to the QE for lifeline support. US economy can only use monetary policy (QE) to stimulate their economy going forward. The US Govt has no debt capacity to use fiscal policy ( Govt Spending ). They can’t use monetary policy to drop central rates so its critical to keep growing their economy. That’s why my theory might hold.

One thing is more certain. US Govt deficits will continue, which means the US Fed will need to fund and their balance sheet will be massive. If this trend continues in the future the western economies as we once knew them will become debt colonies. On the contrary, 2 most important things for monetary policy are inflation and employment. About the inflation FED is confident that it is going towards 2% target. Employment- labor market is doing pretty much strongly as this has been the record employment – 5.1 % since 2008 and even with bad NFP numbers labor market is still very strong – close to full employment. So we might get a war of numbers next few months but definitely last report decreases the probability for a December hike. 

What's your EUR/USD forecast for this last quarter of 2015?

1.0800-0700. As we can see from my EURUSD ANALYSIS last Friday with Fxstreet, 1.1325 zone was sold into. Technicals are aligned with fundamentals as ECB will probably extend QE as inflation target is missed and more policy easing is needed.

Do you expect the risk aversion in the FX markets to pick up with such an uncertain macroeconomic environment?

Good question. I might say “yes” and you can find the answer in your next question :)

Risk off episodes have become more and more frequent. Since 2007 investors have been more worried about tail risks to global eco stability coming from US and EU zone. Risk off episodes can lead to putting assets in other developed markets thus making EM ( emerging markets ) under pressure.

Would you look to buy safe-haven assets? What currency do you think can be the most benefited from a hypothetic risk-off approach?

Well, safe haven assets are by definition low/no risk assets, so I would look into Cash positions and Govt bonds. But to answer this question properly it first requires a definition of “risk-off” investment strategies or behaviour. “Risk-off” refers to an investment decision or behaviour towards a selection for lower risk or no risk type assets often as a result of a perception that risk is considered due to the global economic environment. An example of this behaviour, would be selling risky assets (eg. Equities, property, etc) and investing into low risk assets such as Cash, or Fixed Interest like Government Treasury Bonds. During “risk-off” we tend to see stock markets fall and this has been the case with most major Indices now entering a “bear” market (eg. Greater than a 20% decline from its Yearly High).

On the contrary Risk “on” environment fills investors with positive hopes about the future of economy. That is the time when they speculate in stock market and other high yielding debt instruments. This generally increases the value of the stock market and high yielding currencies, which in the recent past when commodities prices have been high, have been the Australian Dollars (AUD) and New Zealand Dollars (NZD).

The current global economic environment, particularly this year, has seen an excess supply of oil due to new extraction technologies and a weakening demand for hard commodities (Eg Base Metals) due to slowing economic growth and property development in China. This has largely impacted investments in natural resource rich countries like Canada and Australia. Central Banks in both of these countries have raced forward to weaken their monetary policy to stimulate domestic economic growth. This has led to a weakening of the CAD and AUD over the past year, and is akin to a depreciation in these currencies that occurred during the 2008 GFC, which also saw commodities prices drop sharply.   

In contrast, Japan, as advanced economy, is largely an importer of commodities such as energy and base metals for its large manufacturing economy. Cheaper commodities prices of late is providing an economic boon for its domestic manufacturing economy. Tracing the investment decision process a little deeper, and you would see that both Japanese and Foreign investors would shift their investment decisions into safe haven assets of Japanese Govt Bonds or even Japanese Equities, and potentially exiting investments from lowering yields from both risk-on or risk-off type assets present in countries like Australia and Canada. This creates demand for the JPY, and increases supply in AUD and CAD. Despite monetary policy being loose in Japan, there is a lessening divergence in Central Bank rates between the aforementioned nations, thus creating demand for JPY.

In addition, the USA is one of the few advanced economies that may be moving towards monetary policy tightening as it approaches full employment and inflation is normalized. The USA has a deep bond market, both issued by Government and Corporates; of which, both US and foreign investors will seek refuge, creating demand for USD (particularly, as US investors shift investments from offshore back to the US).

In summary, JPY and USD should appreciated over currencies such as AUD and CAD.

In the short-term, are you bearish on the USD/JPY or do you think it will stay on the 118.5-121.5 range?

Yes in short term I am bearish on USDJPY as I have shown last week (150 + pip drop from bearish pennant ) and medium term I see the price between 124.50-115.50.