'ECB will keep using the 'cheapest' policy tool they have access to' - 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.

Is there a possibility of the Fed changing the pace of QE tapering? If so, what could prompt such a decision? When do you expect the Fed to start rising rates?

The Fed – like the other major central banks – will not close off the their options. Just as important, they will make it known to the markets that all options are possible. They do that to prevent any speculative shifts behind view of certainty in monetary policy. The full transparency in guidance that the Fed adopted last June is only good when the market’s need additional reassurance when prone to fear. In more ‘normal’ market conditions though that level of certitude can generate more speculation than the alternative. Since the Taper is status quo and has been presented as such, we would need to see a material downshift in economic activity or significant financial crisis present itself to stop the Fed. I suspect the Fed will take on its first hike in July or September meetings in 2015.

Do you believe that Eurozone's ongoing economic recovery could be damaged by the Russian-Ukrainian crisis? What other risks for the recovery do you see?

Energy prices, trade and possibly even a global financial fear could prove side effects of the Ukrainian situation for the Eurozone. The direct economic considerations for the region to the ongoing predicament however will not likely be as material as the global ramifications. A disruption in general risk appetite poses a greater threat. Confidence (some consider it complacency) in market stability has driven investors to seek out higher rates of return without too much concern as to the risks that accompany their positions. Record leverage is equities, an appetite for junk over blue chip debt and an appetite for higher-yielding periphery Euro-area assets are all effects of this sentiment. If risk aversion strikes in a meaningful way, the capital flows into the Spain, Portugal, Greece and other regional member economies will be reversed. As investors pull out, yields will rise and the assessment will take on a more economic appreciation and the move will likely accelerate.

Will the ECB ease policy at the next monetary policy meeting or will it rather stick to verbal intervention?

The ECB will keep using the ‘cheapest’ monetary policy tool they have access to. For now, they are not seeing a rise in Eurozone yields, an economic reversal, deflation or financial tension. As such, they likely prefer to just keep talking down the euro as long as it works for them. However, if the market starts to ignore the threats and EURUSD makes a move on 1.4000, it would likely prompt the next low cheapest policy effort – a rate cut. Alternatively, if a more systemic issues arises – a stalled economic recovery or financial crisis – the central bank would likely be prompted to adopt something more material – like targeted lending or QE.

Rising yields are helping the USD/JPY bullishness, do you think the USD/JPY has left behind the 102.00 for sure?

No. USDJPY and yen cross yields have gained traction over the past 18 months to two years, but their return is still low on a historical basis. In other words, these are expensive carry trades. In the absence of another strong push in risk appetite trends – which bolsters demand for every basis point of return investors can get their hands on – we could see the floor on yen crosses drop out below them as the BoJ’s presence retreats. If there is a genuine risk aversion move, these pairs would likely be the first on the chopping block for the FX market.

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.

Big banks are betting for a GBP/USD at 1.70, a level not seen since August 2009; What is your take on it?

A move to 1.7000 is not difficult to muster for cable under the status quo. Interest rate expectations continue to lift yields and thereby the sterling. While the FOMC is seen hiking rates sometime around mid-2015, the market is far more confident in its consensus for a BoE hike in the opening months of 2015 or possibly even the final months of the current year. Yet, there is a big difference between seeing the pair extend a lasting trend versus just nudging a little progress. To truly revitalize the cable bulls we would need to see a material shift forward in the BoE timetable which is difficult to do given current expectations and fundamentals. Otherwise, we could see a material downshift in Fed rate forecasts, but the scenarios for that would likely spill over to the UK rate outlook as well.