'Yen weakness should remain as long as equity markets stay elevated' - 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.

After the FOMC decision; what do you expect from the EUR/USD? targets?

The FOMC statement was filled with clues as to when rate hikes might come about. While the phrase "considerable time" was left in the statement, the FOMC's choice to include the word "patient" to describe its attitude towards raising rates is an interesting one. In fact, the last time the FOMC statement included the word "patient" in this context was back in January 2004 and March 2004, which preceded the June 2004 rate hike. The phrase "considerable period" was used in the four prior statements in 2003, for comparison. Late-Q2 or early-Q3 wouldn't be a surprise, then, for a rate hike.

In the near-term, the implications for US Dollar strength may take some time to develop more broadly - other exogenous factors are weighing heavily, particularly year-end rebalancing amid overstretched positioning. However, after failure to breakout of a falling wedge, EURUSD now looks poised for a test of the yearly lows near $1.2245. Thereafter, the longer-term downtrend pointing to completion of the falling wedge is the dominant technical force; the base at the July 2012 low of $1.2041 is eyed.

Do you see the USD/JPY experiencing further gains following the Abe's victory? Or do you expect more correctness amid inflows to Japan?

Yen weakness should remain as long as equity markets stay elevated. Beyond general risk on/off flows, there is little 'juice left to squeeze' from the Abe election trade. The elections were essentially fixed anyhow (475 seats were up for grabs, and the opposition could only field 198 candidates, not enough to field a majority; Abe's LDP party fielded 352 candidates), a mere exercise in affirming the government's power at a politically ripe moment. If anything, the results, which saw Abe's majority lose seats (291 from 295), could result in a pause of the aggressive economic reforms that are costing Japanese consumers purchasing power month after month.

Stevens says Aussie is extremely overvalue, but AUD/USD remains at 0.8200; do you see more bearishness in the short term?

The Australian Dollar is holding up fairly well with respect to a downturn in global commodities; barring a significant swoon in metals' prices, there is little reason to believe that low energy prices will spur much more weakness in the Aussie. Rather, with the RBA in a period of interest rate stability, AUDUSD's downturn will need to be fueled by: (1) 'risk off' sentiment, forcing shifting yield preferences from high to low yielding currencies; or (2) the US Dollar experiencing renewed bullish momentum amid bets on a Fed rate hike in 2015.

What does the CBR do when it's FX reserves are empty? Will we see it digging into its gold reserves? How fictional are the CBR's weekly FX holdings numbers?

I wouldn't use 'fictional' to describe the CBR's reserves. They've burned through approximately 20%, which is a big reason why this crisis differs from that in 1998: most if not all significant emerging market economies have built up reserve levels to substantial levels to be able to defend their currencies. That being said, the problems plaguing Russia - inflation running up towards 10%, corporate and sovereign revenue streams cratering, and the credit market freezing up - still exist, which means the CBR will be emptying its reserves even more over the next few weeks to defend the ruble.

Are central banks (esp BoE and Fed) right to base policy on interest rates that have been held lower by recent oil declines?

Declining oil prices have had little long-term impact on falling yields. The main thrust the past two years has been the distortion caused by the ECB - the threat of the OMT and unlimited bond buying. There have been times in recent weeks when the Italian and Spanish 10-year notes yielded less than the US Treasury note - which is to say that Italian and Spanish paper is safer and presents less credit and government risk than their US counterpart. WRONG. This is an arbitrage opportunity if there ever was one. As long as EZ peripheral yields are low, there'.

What could challenge the consensus view that 2015 is going to be the year of the King Dollar?

2014 was the year of 'King Dollar' - it's already the best performing major currency of the year. There are only two things that derail the US Dollar's continued run as top performer: overstretched positioning; or a global economic collapse that scuttles the US economy, forcing the Fed back into QE4. I doubt the Fed throws Russia that kind of lifeline, however, if Russia is the reason why global markets turn lower.