'Little scope for the ECB to reduce its benchmark lending rate any further' - John Kicklighter, DailyFX

   John
Kicklighter

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

View profile at FXstreet.com

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.

Do you expect the ECB to cut rates further in the upcoming months in order to limit the increase in Eurozone money market rates?

There is little scope for the ECB to reduce its benchmark lending rate any further – the margin benefit of a cuts when the benchmark is so close to zero has been proven in this rate cycle to be virtually nil. That said, there is still considerable speculation the central bank could potentially push its deposit rate into negative territory. Such a move would be a considerable experiment for any major central bank. At this point, the group doesn’t seem to have the will to take a unique move nor is it under the strain that would force its hand. That said, there is still a very real pinch on the economic health in the region and a suspiciously heavy inflow of capital into the markets/debt of Eurozone members that are still in fragile stages of their crisis exit. The ECB can find ample reason to act preemptively with a directed liquidity program (such a directed LTRO) if they chose, but they may be waiting on a distinct financial pinch. Short-term market rates are at a 16-month high, but their measure and breaking point for the measure is unknown.

Will we see the Fed sticking next week to the taper strategy presented in December or will it be modified?

The FOMC will most likely decided to keep pace on their newly adopted Taper regime when they settle up on January 29. The central bank is looking to avoid surprises for the capital markets which could in turn spark financial uncertainty (instability). There was some concern that after the December payrolls and its dismal miss that there was an argument to consider a pause. Yet, in the week of Fed official speeches that followed, it was clear that the authority was making a concerted effort to shape market expectations towards further QE reductions. From hawkish to dovish, the range of speakers insinuated – or outright stated – that a steady Tapering was the path.

Do you think that the Chinese growth rate could slow considerably this year? If so, how much could it decline?

China has already told the world that it expects a more moderated pace of growth in 2014 as they make structural changes in the underlying engine for growth – moving more towards domestic consumption and away from exports – and acted to curb credit-fueled expansion to safe-guard financial stability. If China were concerned that their plan for the economy threatened to stall the engines, they would have plenty of room to ease back on their austerity efforts – though that could very well fuel greater problems later down the line. There is also the lasting global impression that the national statistics we are presented with are of questionable quality. There is reason to be dubious, but investment decisions and policy are still made on them; so we work with what we have.

Will the USD be the king in 2014?

The dollar is well positioned in 2014 to be one of the best performing currencies. From an economic standpoint, the economy – though not growing at an incredible clip – is expanding at a steady and reliable pace. The burden the US monetary policy authority carried in the years following the 2008 financial crisis is shifting to other countries that are further behind in the monetary policy curve and/or are on less stable economic ground. The asymmetrical policy effort will bolster benchmark rates while steadfast growth will encourage investment with higher returns.

With the EUR/USD losing around 370 pips in the last month to the 1.3500 area, do you see more bearishness in the pair?

The dollar is pulling its fundamental weight for the EURUSD pairing. Persistent Taper speculation and stable growth forecasts (recently upgraded by the IMF) make for a bullish outlook. The euro’s own bearings are not as confidence inspiring. Yet, concerns are being plastered over by heavy capital inflows into the region’s markets and sovereign debt. We have seen global investors seeking meaningful returns in this low-yield world driving capital into the government debt markets of the Eurozone periphery. In fact, the appetite has been so pervasive that we have seen Spanish and Italian shorter-term yields hit record lows – odd for a country with a jobless rate above 25% and another with the largest debt level in Europe respectively. These speculative flows are exposed to the same risks as any other ‘hot’ market built on leverage and a blind appetite for any and all returns. Yet, they can persist – and counter the dollar’s outlook – as long as complacency remains.

Do you see further tapering in next week FOMC meeting? In that case, do you expect a USD/JPY break above 105.00 and targeting at 110.00?

I do expect Tapering especially after the Federal Reserve’s member made such a concerted effort to shape expectations of exactly that last week. Yet, this is not a unique view. The probability of a Taper in January and further moves in subsequent meetings seems pretty pervasive, so there may be a limited ‘surprise’ response to the initial announcement of a confirmed reduction in QE. That said, the paths between the US and Japanese monetary policies are growing increasingly divergent. The Fed is Tapering while the BoJ is expected to be moving towards an upgrade of its own stimulus effort. That is an ideal scenario to drive USDJPY higher…that is as long as risk trends are steady. The devaluation of a currency (the yen) is a powerful fundamental driver. Yet, the FX market is willing to support this build up on the yen crosses (drop in the Japanese currency) so long as they have the free capital to pursue low returns. If volatility were to pick up and investors started to recognize potential losses in exchange rates or require capital on hand, they may quickly unwind this passive exposure.