'There is little reason for the Fed to reconsider another bout of QE in the near-term' - Christopher Vecchio, DailyFX

Christopher
Vecchio

PROFILE:
• Current Job:  Currency Analyst for DailyFX.com in New York.
• Career: dual Bachelor of Arts degree in Government & Law and Economics from Lafayette College.

View profile at FXStreet

Christopher Vecchio is a currency analyst for DailyFX.com. With a background in political science and law, he focuses on the interrelationships between geopolitical events, macroeconomic trends, and market reactions. Also an active trader, Christopher monitors the markets around the clock.

What effect will the end of Fed's QE3 have on the US economy in the medium term?

Rising front-end rates could keep the US Dollar supported in the near-term. With US economic data moving in the right direction - truly buoyed by what's now proving to be a sturdy and resilient labor market - the only concern for the Fed is the disinflationary environment. Even falling inflation expectations aren't a major source of concern for the Fed - they recognize that a lot of it has to do with the decline in energy prices over the past three months. Unless the US economy has another winter like last year (a distinct possibility), there is little reason for the Fed to reconsider another bout of QE in the near-term.

BoJ eased policy further last week, surprising the markets. Do you think this action is sufficient to bring Japanese inflation towards the 2% target in two years? Will it allow for the second rise in the consumption tax in your opinion?

No. Nothing Japan can do at this point will work. Japan is the Walmart of economies - it needs a weak currency or else. Demographics are working fiercely against policymakers, and policymakers are grasping for straws at this point. We may be nearing the point where market participants say "Alright, that's enough, Kuroda."

What are the greatest risks for the Eurozone recovery currently? Is there a possibility it slips back into crisis?

Lack of reform on the fiscal front. The ECB is doing all that it can at present time, and the only reason sovereign QE is even being discussed is because fiscal policymakers have fallen well-short in their responsibilities for cleaning up their budgets. This, of course, was expected: lower rates takes the impetus off policymakers for the tough decision in the near-term; if borrowing costs are low, then who is to say that there is a financial issue? The logic being employed is deficient in many ways.

After BoJ bazooka, almost the whole market is expecting for further highs in the USD/JPY, do you see the pair jumping to 115.00 and even 120.00 in the short term?

Â¥120 seems like a reach at this point given the fact that the market is already overly saturated with US Dollar long positions; a brief pause in the rally at a minimum wouldn't be surprising. That being said, with economic activity in the United States and Japan diverging - the Fed pulling out of the market while the BoJ is arguably becoming its biggest player - we very well may see ongoing JPY depreciation for some time, especially as market participants come to terms with the fact that Japan's fiscal and monetary policies aren't long-term solutions, merely short-term bandages.

The EUR/USD remains 'pegged' at 1.2500, but experts are calling for new lows around 1.230 and 1.20. What is your target in EUR/USD?

$The bearish rising wedge would be complete on a retest of the 2012 low at $1.2041. Even though markets are saturated with EURUSD shorts (IMM data shows largest USD long position ever, second largest short EUR position since July 2012), it's also important to consider there is a great deal more capital in the region now than there was in 2012 (the last time we saw these extreme sentiment readings). Data from Eurostat underscores the notion that there is more capital coming into the region, which may mean that we could see more extreme positioning readings in the US Dollar and the Euro before a major low is set in EURUSD. In 2013, EU-28 foreign direct investment (FDI) inward flows increased by +12% over the 2012 EU-27 levels. In 2012, FDI inward flows had fallen by -31% from their 2011 levels.

Further to this point, as the ECB pushes yields lower with its latest actions, it is also attempting to change investor behavior (no different than what the Fed tried and succeeded at doing - see the US stock markets as exhibit A).

Euro-Zone investors need to search for yield and can only find it outside of the Euro-Zone. Prolonged low rates could accelerate capital outflows, which would help drive a weaker Euro. Indeed, the ECB's balance of payments report for August (most recent reporting period) shows that outflows accelerated through the end of the summer.