'EURUSD may face profit-taking and bounce into the 1.32-1.33 area' - Ilya Spivak, DailyFX

   Ilya
Spivak

PROFILE:
• Current Job:  Currency Analyst at DailyFX.
• Career: He holds degrees in Economics and International Relations from the University of California.

View profile at FXStreet

Ilya Spivak applies a global macro approach his analysis, taking a longer-term view on investing in the G10 currencies that often incorporates cross-market relationships and geopolitics. Ilya’s research has appeared on CNN Money, Reuters and Bloomberg News. Before DailyFX, Ilya spent a number of years in FX Sales and as a Researcher at the Center for International Trade Development. He holds degrees in Economics and International Relations from the University of California. Ilya authors a number of regular articles for DailyFX.com.

What impact will ECB's TLTRO program have on the real economy in your opinion?

One issue with the TLTRO effort as it was presented in July is that it wasn't clear whether banks taking up the loans would necessarily deliver the capital to the real economy in the short term because of a significant time lag between when the money is allocated and when the ECB will check how it is being used. From a trading perspective, that has meant translated into continued Euro weakness as traders bet on further easing, which the ECB delivered at the August meeting. Watching credit and inflation numbers will be important going forward to see if the ECB's efforts are working, which will help forecast whether the existing stimulus package is working or if more is needed.

Do you expect more BoE MPC members to have voted in favor of a rate hike at the monetary policy meeting on Thursday?

While it is possible that more MPC members voted for a hike, I think it is will be some time before a hike actually materializes. Inflation remains anemic while leading survey data hints the economy’s momentum may be flagging, suggesting it may not be so easy for the hawks to build a voting majority.

Which of the current geopolitical conflicts could weigh most on the global economy in case of further aggravation?

From a trading perspective, the relevant question is whether any of the geopolitical flash-points we are currently watching have the power to produce broad-based risk aversion in the financial markets. The answer to that question thus far has been "no". It is conceivable that a broadening conflict in the Middle East that pulls in a critical mass of key players in the region to address the IS threat spooks oil markets and reverberates elsewhere, but this seems like a long-shot. Furthermore, markets have consistently demonstrated that they care more about monetary stimulus trends than geopolitics when it comes to lasting trends in recent months. That seems likely to continue as the Fed winds down QE while the ECB ramps up easing.

As the USD is trading at 13-month highs with EUR/USD falling below the 1.3200 and speculations on ECB actions; do you expect the USD extending gains to trade below the 1.3000 versus Euro in the middle term?

The narrative for EURUSD has been largely unchanged: the Fed is moving away from the dovish extreme on the monetary policy spectrum while the ECB is going the other way. Not surprisingly, that has led EURUSD materially lower and is likely to continue to do so considering the FOMC is still in the infancy of its normalization cycle. With that said, markets don't move in straight lines for long and a correction seems likely sooner rather than later. It is possible that after the markets perceive the ECB as having done everything they're likely to do for a while before settling into wait-and-see mode, EURUSD will face profit-taking on shorts and bounce somewhere into the 1.32-1.33 area. The dominant down trend is likely to remain intact however.

USD/JPY jumped above 105.00 in the latest sessions amid BoJ measures, Do you see the USD/JPY climbing to 110.00 in the middle term?

I don't think the BOJ is driving catalyst for USDJPY at this point. The outlook for the Fed is critical. Improving US economic data has understandably fueled bets that the time gap between the end of QE3 and the first rate hike will be relatively short, sending the pair higher. With that in mind, the looming approach of Fed tightening may also trigger risk aversion, which would bring with it the unwinding of Yen-funded carry trades. That opens is likely to generate a USDJPY correction lower, though the larger trend is likely to continue pointing higher. While 110.00 is absolutely attainable, prices may not hold up there if the level is hit before year-end without a risky assets shakeout.

What is the best trade in September?

Being long the US Dollar remains the dominant theme. While many of the greenback's counterparts have already moved a lot lower and look vulnerable to a correction sooner rather than later, AUDUSD has lagged. While an actionable short entry signal hasn't materialized yet, a break out of the 0.92-0.95 range may open the door for a meaningful selloff.