'A rebound from the EURUSD is more likely to be restrained and a struggle' - 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

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.

The EUR/USD has been trading around 1.2500 throughout the month of November; which is, in your opinion, the catalyst needed to the pair breaks downwards or upwards?

A rebound from the EURUSD is more likely to be restrained and a struggle. An eased outlook for the timing of the Fed rate hike is the most capable spark for bulls here, but the ECB is committed to be the most dovish central bank in town; so a tempered Fed view wouldn’t come close to the expansive position of the ECB. Extending the bear’s drive may have fewer boundaries, but a decade’s range floor around 1.2200-2000 will have even the fundamental crowd second guessing its capabilities. If the ECB pushes sovereign bond purchases (a traditional QE program) or a broader aversion to ‘risky’ investments develops; that would carry the kind of heft to usher the next critical stage of a bigger decline.

What are your thoughts on the comments from Mario Draghi that ECB purchases may expand to gov bonds? Is full-blown European QE the next step (the first round of US QE involved ABS)?

If there weren’t unpalatable political implications for ECB government bond purchases, the central bank would have adopted a QE-style program a while ago. However, there are issues with buying such debt that make it a difficult pill to swallow. Whose bonds do I buy? Should I avoid countries’ debt who aren’t living up to fiscal objectives laid out by the Eurozone leadership or Troika? Will the German and other conservative country electorate see this as monetizing debt? These are questions that will be asked. The ECB will likely move this direction regardless, but there are probably additional clumsy stimulus steps before that point.

Would you rather have Mario Draghi's problems or Haruhiko Kuroda's?

Neither central bank leader is at the helm of a particularly easy policy ship. Both Draghi and Kuroda are dealing with disinflation and the threaten of stalled growth. Both are increasingly at odds with their respective government counterparts for a fiscal balance. If I had to choose, I would probably take Kuroda’s job. He has decades worth of economic and financial trouble to straighten out; but he has fewer constraints on its stimulus options, he has fewer political counterparts to please, he has a quieter board and a more manageable environment to respond to with only one economy.

The rule: 'bad news is good news for yen', seems to be broken as USD/JPY rose to multi-year highs after the latest developments in Japan; what is your opinion on USD/JPY and targets?

Bad news is good for the yen…just not bad Japanese news. When we see a Japanese recession, a snap election and a delayed tax hike; the ultimate interpretation – much as it was with the Fed a year ago – is more stimulus. That is a direct weight on the yen. When sentiment sours on a global basis, that is when investors unwind their ‘riskier’ or more expensive trades, and the over-priced carry trades will quickly be on the chopping block. A climb for USDJPY is best served on status quo where sentiment is steady so that it doesn’t encumber the carry aspect and Japanese officials are still believed to have room to further ease and thereby devalue the currency. Alternatively, if risk aversion kicks in; this pair would drop quickly. While probabilities still support the bulls, the ‘potential’ (volatility) presents the greater risk for a rapid drop.

What do you think the next move from the Bank of Japan will be following the GDP miss?

The Bank of Japan may upgrade its stimulus effort, but it will be difficult to do so soon after the October upgrade. The October move was a surprise, and its impact was arguably more restrained than the initial introduction. To take another step without a strong response would undermine confidence in the entire program itself. Kuroda and company will likely spend some time establishing in data whether the 3Q GDP figure was a one-off for its extreme (it won’t return to robust growth, but perhaps it will balance to moderate growth). If the data levels out, they will hold their hand. If it worsens and the political pressure builds, though, the BoJ may be forced to act.

What is your take in the UK forex probe case?

The probe into Forex fixing – like the Libor scandal – is looking into whether banks colluded to move the market in a specific direction or to a certain level on the ‘fix’ to the benefit of some unscrupulous traders at large banks. Looking back, this did in some instances have material impact on some exchange rates around that fix; but the markets would return to their underlying trend shortly after it went through. We have since seen price action normalize around these times as it is out in the open. Regulators are paying closer attention and are making it a more even playing field for the average trader in commodities, fixed income and forex.