'Risk-off sentiment getting stronger, USDJPY could go to 100 in Q2 or Q3' - 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.

What's exactly going on in the markets? Is this just a temporarily turmoil or are we about to witness a big financial crisis?

Equities markets have drop to multi-year lows and are experiencing Bear Market conditions, which means they have dropped more than 20% from their previous highs. Most of these Equities markets have been in decline since as early as April 2015. Nonetheless, the slowdown in China has caused Commodities prices to drop the last few years, and its only now, that investors are starting to put caution to the wind that Banks may be exposed to non-performing loans in the Commodities sector. This has caused a large panic run on selling of Finance and Energy related stocks, particularly since the start of 2016.

It’s hard to say whether we have a big financial crisis on our hands, usually this would usually require major corporations and/or major banks filing for bankruptcy to undermine the systemic risk in the financial markets. This hasn’t happened yet, but what we can observe is investors heading to the safety of Government Bonds (as their yields have dropped), Gold (also recording large gains in prices) and safe haven currencies like CHF and Yen. Keep an eye on the Ratings of the Major Banks, along with the Credit Default Swap rates on the Major Banks; with the latter almost akin to the insurance value and default risk of an underlying entity.

The EURUSD is slowly grinding higher. Do you think the ECB may intervene, as other central banks did, to talk down the Euro?

In that case I will be watching EUR vs CHF and SNB action. If we witness a depo rate reduction from ECB, the SNB could intervene. It could be a form of intervention where SNB could go with deposit rate cut up to -1.25 which is the lower threshold. Other form of intervention will be strengthening their own currency which would weaken the EUR but that solely depends on ECB actions next month. I expect additional easing by ECB in March where we might see investors getting back to safe haven currencies.

Can the USDJPY continue its run downwards? What are the key levels for the pair?

Yes. It depends which time frame you are watching. I see even 100.00 in Q2-Q3 as investors are looking to buy JPY. Shorting USDJPY and EURJPY could become profitable mid term. You need to understand how the market works. Let me explain you the easiest way and in short: In risk off sentiment JPY is getting stronger now. That means - Gold up, Commodities prices down, Equities down and Yen strengthens as a result. It happens because the Japanese can get cheap credit, so they invest overseas heavily. 

When its risky, they bring the money back creating demand for Yen and vice versa, when its bullish Equities, they pump their money overseas, which means they sell Yen and buy foreign currency.

Key levels are : 110.10, 105.20 and 102.85 before 100.00

Right now, has any central bank (besides the Fed) the power to talk up or down any currency?

All Central Banks have the ability to talk-up or talk-down their currency, its however, a question of how the markets will respond to this in the state of the current ever changing risk-on and risk-off sentiment of the broader markets. A classic example was only a week ago when BoJ decided to take official interest rates into negative territory, this caused temporary weakness in the JPY and pushed the Nikkei higher for the day, however, as the broader market risk-off sentiment prevailed, the JPY continued to strengthen and the Nikkei wiped out those gains and ended lower. I would suspect that Central Banks of Emerging Markets and Commodities led economies of Canada, Australia and NZ have the ability to further talk-down their currency in-line with general market views.

As the JPY, the other safe-haven star has been Gold. Do you think we may see a long bullish trend on the yellow metal or will it correct lower soon?

Gold hit its first target, being around USD1260/oz, which was the very top of the long-term downward trend channel that has been in play since July 2013. The velocity of the upward price movement of Gold in USD terms had accelerated a lot last week as Global Equities went to multi-year lows. It is likely that the Gold market may retrace temporarily over the next couple of days as Global Equities markets assess the major sell-down, but look for a break of this downward trend channel in Gold prices in USD terms should risk-off sentiment prevail in other markets in time to come. I would look for Gold price to continue to outperform should the US Fed Res Bank decide not to hike rates further, meaning yields are lower in fixed income markets, along with risk-off sentiments prevailing in risky markets (Equities and Property).