'Big chance of further QE and rate cut from ECB, EURUSD could continue sell-off to 1.04-1.02' - 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.

So we're here: December 2015. ECB and Fed about to have decisive monetary policy meetings. Which meeting do you expect to be the bigger one for the FX market?

It is a rhetorical question. Both policy meetings are important because we need to look for either a convergence or divergence in their respective monetary policies. A higher divergence between Fed’s and ECB’s monetary policies will induce new dollar strength. If we watch the bond market, it has anticipated more QE from ECB so it is helping to counterweight selling pressure which has been induced by expectations of Fed tightening. We have a week with two key Central Bank events and there will be a huge volatility. Expectations are high (ECB with further easing, FED with a rate hike), but the risk remains if market fails to deliver the expectations.

Do you expect next NFP report to trigger wild volatility as the last one did?

Only if the deviation from forecast and actual result is high. Unemployment rate is expected to show no discrepancy between forecast vs actual (5.0 % vs 5.0 %) while NFP is expected to drop from 271k (non-revised) to 201k. Traders should not pay attention only to NFP data but also to Unemployment rate which is released at the same time with NFP.

That said. What kind of action do you expect this month on the EURUSD?

In my opinion, there is a big chance that ECB will announce further QE at its next meeting along with a rate cut. That is solely MY opinion. I am not sure whether they will cut the rates for 10bp or 20bp but there is a possibility they might do it. Earlier last week Reuters reported that ECB officials were considering options to stagger charges on banks hoarding cash. The inflation is low, EU zone recovery is stagnant, EM (Emerging Markets) are slowing down and ECB should take action.

If the ECB and FED policy continue to diverge further I expect EURUSD to continue with a sell off towards 1.0400-1.0200. Sell on rallies should be the option then.

This week there is also scheduled a RBA meeting. What do you expect from the AUDUSD considering its late consolidation between 0.70 and 0.74?

The Australian bond market is currently pricing no rate change by the RBA, and this makes sense as the RBA wait cautiously to see whether the US Fed decide to hike rates in the middle of December. The US bond market is almost pricing a 25bps rise, and this is largely due to the US now reaching full employment. I expect the AUDUSD to continue to range between 0.70 and 0.74 until the next FOMC meeting, where the rate decision could cause this market to move once again. Should FOMC decide to hike rates in the US, expect the AUDUSD to drop towards 0.6850-0.6700 and should FOMC decide not to change rates, then expect the AUDUSD to continue to range (or increase, towards 0.75)

Can the war against ISIS in Syria and Iraq lift the oil prices or would the crude oversupply be able to avoid a rally in the prices even in such situation?

Syria is a small producer of oil, and has small oil reserves in comparison to other nations, so the effect of conflict within Syria is negligible to oil supply and the oil price directly. Nonetheless, instability in the region will add risk to the underlying oil product, which is in abundance in the region. As for Iraq, it is both rich in oil reserves and is one of the largest producers of oil, roughly producing 3.3 million barrels per day, approximately 3% of world supply. OPEC President Edmund Daukoru said that the global oil market is oversupplied by about 2 million barrels per day, so disruptions to Iraq’s oil supplies can influence the short-term oil prices. However, given the current oversupply of oil in the world in the short term, it is unlikely that this will lift the oil prices dramatically. For further information on the current state of play on the oil market, please refer to one of my earlier posts.