'Market is still acclimatizing to tapering reality' - 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.

Which markets would be most affected in the case of a further escalation of the situation in Ukraine? What would happen if Russia proceeded a full-scale military invasion?

‘Standard’ event risks carry discrete implications for markets. They can range from an extreme ‘better than expected’ to ‘worse than expected’ impact, but we can still assess with reasonable certainty how they will impact the markets. With something like the Ukraine situation and the implications of its geopolitical and financial implications, it is difficult to see how far its impact can reach. That creates a greater unlevel of certainty – hence the market’s open on Monday after the situation intensified. Anything that has an extreme exposure to risk exposure is particularly at-risk. Yen crosses and emerging market currencies are perhaps the most immediately in jeopardy should the situation escalate. The dollar stands out as the most favorable as its safe haven status shines when fear deepens.

How severe is China's growth slowdown, to which more and more signs are pointing, including this week's PMI releases? Will the country meet the 2014 GDP target of 7.5% this year in your opinion?

Premier Li Keqiang maintained the 7.5 percent target for 2014 GDP, but it was suggested that 7.0 percent was a tolerable pace as well. If China were determined to keep its economic engine running hot, they would likely be able to. They are trying to actively steer activity by balancing the breakneck pace of past years with the need for reform in credit, housing and environmental factors. Allowing investment via ballooning debt loads to support the foundation for growth is not a viable long-term strategy. It would eventually lead to a popped bubble. However, if they move to deflate it too early, they could inadvertently stall growth – and stall speed is not zero for China. It is important to measure growth potential versus loan growth, as we are talking about economic activity versus the intensity of a very real asset bubble.

How serious is the threat of deflation in the Eurozone?

Actual deflation (contracting prices) in the near-term is a low probability. Policy officials have repeated this, and there is no reason to doubt them. However, below-target inflation – or disinflation – is a genuine concern. If the central bank fails to foster reasonable inflation rates, they could see the negative effects via productivity, growth and financial markets (lending). This is a serious enough trend that is likely to lead the ECB to some sort of accommodation to correct the pace over the next few months.

With the US stocks market trading in good news are good news mode, what would be, in your opinion, the reaction in stocks and the USD with a good NFP number? and If the case, a change in the Fed taper process?

The market is acclimatizing to the reality of a Taper, but they don’t fully appreciate what it means for their exposure going forward. With the slowing growth of the open-ended stimulus program, the limitations of supranatural central bank support are more palpable. Investors will start realizing that they will not be universally protected from taking on their excessively risky positions. Yet, that recognition needs to be knocked out of balance with the appetite and complacency in our current reach for yield. The Fed as a whole and through individual members has warned that the Taper is the current path, and it would take a significant change in circumstances to turn from that course. If the NFPs disappoints under this scenario, it can unnerve growth forecasts while maintaining Taper expectations – a risk aversion scenario that supports the dollar. If it impresses, it is unlikely to usher in a new era of strong growth, revenues and yield – but that Taper remains…

The Euro remains trading at monthly highs against the Greenback, with the fed reducing its monthly pace of purchase of bonds, do you see this pattern sustainable?

EURUSD is trading a range that is around 300 points wide. That seems like considerable room when you put it in context of the multi-year wedges that are building around it. The 1.3800/850 resistance is the cap on a near decade long wedge while the 1.3500 floor has guided price since July 2012. Looking at volatility measures (I like the 20-day ATR), we find that trading conditions are dangerously quiet and suggestive of a breakout in the near future. This squeeze will break. The path of least resistance both technically and fundamentally is a bearish one.

Some voices say that the BoE will be the first bank to close the expansionary cycle, in this framework where are the Sterling frontiers against the Euro and the US Dollar?

Amongst the largest central banks, the Bank of England likely has the slight advantage for the timing of the return to rate hikes – a considerable appeal for its respective currency. We have seen the pound take serious advantage of a quickly growing rate forecast in the UK, but it may have already saturated expectations. The BoE is adamant that the first hike is unlikely until 2015; and even if they do hike, it wouldn’t necessarily be the start of a series unless there was an inflation issue. Realistically though, the BoE time frame is likely very close to the Fed’s. That creates a premium imbalance for a pair like GBPUSD which is at multi-year highs. If data softens in the UK, GBPUSD is at serious risk of a correction. As for EURGBP, an easing in policy from the ECB could offset any tempered hopes for the UK policy regime.