'Fed rate hike not priced in, EURUSD on sell-on-rallies mode' - 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 Senior lecturer and market analyst 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.

It seems market is assuming that the Fed hints a possible rate hike in December; do you think the same? If not, when do you think the Fed will increase its interest rate?

To date, the US Fed Res Bank has been jawboning with regards to an interest rate hike. The Fed has made it clear that Inflation must be over 2% and full employment (5% and under) in place before they would consider a rate hike. To date, annualized Inflation is 0%, largely due to a strengthening USD (eg cheaper imports) and weakening commodities prices. Full employment is near, but the overriding weakness in Inflation will delay any rate hike. For this matter we need to understand “Phillips curve” which I will be explaining later in the article and which might be a cue for a rate hike. In the month of August 2015, Equities markets took a major dive and this was another excuse for the Fed to delay a rate hike, but since then Equities have recovered and is less a risk. 

We should definitely consider a short term unemployment rate (people who are out of work less the 6 months) reading which is very important as it strongly correlates with signs of inflation. The relation between short term unemployment and prices has been held for quite a time. It is called “Phillips curve” -increased levels of employment will correlate with higher rates of inflation. Before Fed’s last meeting it was pretty much clear that there will be no rate hike this year. But now, after the last Fed’s meeting we’ve had a very clear signal that there MIGHT be a rate hike in December. One of the hints is “Phillips curve” which I have explained and Fed’s officials have been mentioning it (if you are able to read between the lines) at the last meeting. The other side of the coin is that if there is no rate hike in December then my guess is that it could be at least until mid 2016 assuming no major issues to global economic growth. 

In the case the Fed raises its interest rate, what would be the effect in the FX markets? Don’t you think the decision is already priced in? Anything like sell the rumor buy the fact?

I don’t think it has already been priced in the market. If you remember of my 1st interview with FXStreet I said that I expected the EURUSD down to 1.0800-1.0700 in Q4 2015. As you can see the price has dropped and it is still dropping towards 1.0800-0700, although we should always be prepared for surprises. General bias and market sentiment is to sell on rallies. I don’t think EURUSD has been priced in as there will be room for more downside, providing we see rallies. After a strong trend there might be even stronger retracement, but in the end – the trend prevails.

EUR/USD went down after hawkish Fed but has bounced back to 1.10 since. Where do you think the pair will end the year? If you had to choose a direction, where do you think it will be nearer to: 1.20 or parity?

I think it could go towards 1.0500 but it is difficult to say precisely because there are a lot of factors involved. Fed hike/no hike, China slowdown, Shanghai index, divergence in policy between ECB and FED, global risk sentiment, EOY profit taking (End Of Year profit taking)… Anyway we need to be ready to REACT whatever the outcome will be.

The BoJ finally did not deliver an increase in its QE and the Yen is gaining across the board. Do you think it will be temporary and the USD/JPY could go for further highs?

As is already explained USDJPY is ranging, with a slight bullish bias on USDJPY. We might see 125.00 in December.

The RBA has scheduled its monetary policy meeting this week and there are some voices saying they could cut interest rates. Do you think the AUD/USD bears can gain more momentum?

The RBA has concerns about the slowing commodities prices and demand for Australia’s major exports to China. If China experience a hard landing, we could see commodities prices to drop further, which will affect the AUD negatively. Albeit said, the RBA is concerned about reducing rates further as it could further fuel asset bubbles in property. The RBA indicated at the start of 2015 that it wanted to achieve 0.75 for the AUDUSD pair; currently it has surpassed this achievement as it is currently at 0.71. On that basis, I doubt the RBA will cut rates further. Having said that, if commodities continue to weaken further, expect AUDUSD to weaken further under free markets.

EM currencies like the MXN, CLP and COP are at lows against the USD, do you see further lows specially with commodities prices and the strong dollar?

With regards to MXN, they export a diverse range of products from manufacturing, to oil, and agriculture. I am neutral on MXN, as its exports are diverse and it has strong employment and inflation. If anything the MXN may recover and improve from here.

With regards to CLP, their major export is Copper, roughly 53% of their total exports. It is anticipated that copper supply will be in a short deficit in upcoming years, this may fuel a recovery in the price of Copper and the CLP accordingly. With unemployment in Chile at 6.4%, but inflation at 4.6%, there is little room for further monetary stimulus. Look for a recovery in Copper prices and the CLP will follow. With regards to the COP, they export a range of products from agriculture to computers and electronics. They have the weakest unemployment at 9%, but inflation is at 5.35%, with the later, possibly limiting the ability for monetary stimulus. Look for potential weakness in the COP.