'ECB will go for the most effective and least experimental policy in June' - 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 believe that the recovery in the Eurozone is sustainable, in the light of the stubbornly high unemployment and declining bank lending?

The recovery for the Eurozone is sustainable in so much as it will be a steady revival from a very significant crisis of economic health and monetary unity. However, this is not likely to be a rapid an unblemished return to robust growth. Already we have seen a significant split between the pace of recovery between the ‘core’ and ‘periphery’. There are even further differences within these groups which are to be expected from those that have offered help during the crisis and those that received it. Those that have received the most and are under the most stringent requirements to balance debt and economic health will likely see the slowest return to full strength. In the meantime, the slowdown in global demand, fresh geopolitical issues and the risk of over-leveraged financial markets may soon prove another setback for the entire region.

What actions do you expect the ECB to take at its upcoming meeting in June?

Central banks are trying to be as clear as possible lately not out of magnanimity but more so that they are more effective in guiding capital flow and exchange rates. The ECB risks seeing the recovery effort stalling, they already have weak inflation issues and the exchange rate is tracking out a steady appetite for higher-yielding return amid the global chase for yield. They have a number of issues they want to try and get ahead of, so accommodation is expected. There are many combinations of expectations of what they use – rate cuts, negative deposit rates, halt bond sterilizations, targeted lending programs, QE – but a ‘kitchen sink’ approach doesn’t help the monitoring effort and it insinuates they have no further recourse. They will likely go for the most effective and least experimental policy. I think a targeted lending program is likely and perhaps a rate cut.

Recent data has shown that consumer spending in Japan is slowing after the introduction of the sales tax in April. Do you believe it's a temporary effect? When could we see a rebound?

A sales tax hike will have a necessary impact on consumption as less capital is available. However, that magnitude is the object of close scrutiny for the government and central bank. The overall impact that this has on spending will be amplified or minimized by the level of general growth Japan is able to manage. Both Finance Ministry and central bank believe that the economy will grow markedly – so much so that there is no impetus for further QE expansion from the BoJ and the government is already talking about evaluating another hike over the next few quarters. This ‘all-in’ approach those is very dangerous as it is easy to miss the market and necessitate unorthodox support.

With the EUR/USD trading under pressure, do you see the pair falling below the 1.3650 area? Why?

The fundamental themes behind the Euro and Dollar are likely to pull the pair below 1.3650. And, the impetus is more likely to be a Euro decline rather than a remarkable dollar rally. In general, the difference between the two currencies’ monetary policy forecasts is exceptionally divergent. The ECB is looking at the probability of new accommodation (rate hikes or stimulus) which is a considerable contrast to the Fed’s slow but steady charge towards its first rate hike. While their respective moves may not be immediate or incredible (no 50bp rate hikes or Є2 trillion stimulus), the contrast remains significant. If we further add a risk aversion element to this mix, it will accelerate the move.

The USD/JPY is looking very resilient to break recent range in any direction, what is your take in the USD/JPY?

USDJPY has good reason to lose momentum – it is stuck between two different themes. On the one hand, the Bank of Japan has been a critical reason for the yen to depreciate in the lead up to and after the April 4, 2013 introduction of the open-ended QE program. That stimulus had a huge impact on the currency with significant depreciation (gains in the yen crosses). Yet, much of the drive that resulted was based on expectations for the program that was realized and further speculation of future upgrades. Now having priced in that QE, the future upgrades are carrying the current phase of the bull move. With data improving on both inflation and growth, that need has diminished and the possibility of more yen-driving stimulus is easing off. This is not necessarily a proactive element to a reversal though. That rests with ‘risk trends’. And the appetite for yield has yet to relent.

While the Dow and the S&P are reaching fresh all-time highs, the Nasdaq is trading negative; What do you think of this broken correlation?

While the core indexes in the Dow and S&P 500 have forged new record highs, their progress is very limited. In the past month, the ranges for both were actually quite modest. The Nasdaq and indexes that give greater weight to small caps highlight certain segments that are underperforming. In essence, there is limited bullish strength from most segments, while a few are very dovish. The risk is when those few generate momentum for the many.