'First Fed rate hike now more likely to happen 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

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 Fed dropped the “patience” word from their statement triggering some up-and-down dollar volatility. Do the dovish FOMC Economic Projections put a brake on the dollar rise for a while?

The FOMC has made a concerted effort to try and desensitize the market to the change in monetary policy that is coming. Different markets have acclimated at different paces – the S&P 500 continues to operate with its head in the sand as the reach for yield has become so deeply ingrained that it seems that the risk will need to be a threshold before investors reposition. The Dollar is on the opposite end of that spectrum. An 8 month rally likely reflects more than the first 25 bps rate hike. So, despite the progress on the timing, the moderate curve behind the first move sent some late-to-the-game speculators reeling. The divergent policy bearings though righted the Greenback quickly. Without distractions, the currency would likely rise unencumbered for some time. But there is plenty of event risk to generate volatility and additional corrections along the way.

When should we expect the Fed rate hike? Is it now more likely on September than June?

The first hike is more likely to happen in June than what we were looking at towards the beginning of the year. The carefully crafted language by the Fed has attempted to guide expectations as much as possible without ‘pre-committing’. We know the central bank gauges the market’s view via surveys (Primary Dealer Survey, Market Participant Survey, etc) so they know how to craft their approach. The removal of patience, the number of officials saying ‘mid-2015’ or even ‘June’ were reasonable forecasts, and describing low inflation as transient reads like reasoning for a June hike. Interestingly, Fed Futures have pushed expectations further back to November. Perhaps inflation projections or complacency are strong here, but it will likely shift forward as June approaches.

How do you think this is going to affect the EUR/USD? Will the euro see some relief or is parity still on the scope?

Parity is well within EURUSD’s capability, but it will become an increasingly hard-fought progression the closer to 1.0000 we get. The underlying disparity between the Euro and Dollar are profound. On monetary policy, the former is just starting QE while the other is staging for its first tightening. For economic activity, the US is once again the benchmark to the Euro-area’s struggle to lift from stagnation. And, should risk aversion kick in, the Greenback is a haven. Particularly from the Euro’s side, improvements simply don’t mark a meaningful opportunity but rather a moderation of pain.

US stocks, oil and gold, different instruments are taking advantage of temporary USD weakness... will it last? Do you see the gold holding above 1,150?

Stocks is a world unto its own. This has been the go-to for average investors looking to take part in a financial market buoyed by global stimulus. US equities in particular will be the last to go should speculative appetites falter and recognition of a bifurcated monetary policy outlook take hold. For oil and gold, there is little support to be found from the Dollar. Energy is being overwhelmed by supply-and-demand factors which are exacerbated by a more expensive pricing instrument. Gold faces the tallest hill to regain prominence. There is little inflation so far, the ‘alternative to currency’ value it held before is now moot as capital flows into the Dollar, and the prospect of rising US yields exposes the metal’s lack of interest income.

The USD/JPY posted a fresh multi-year high before retracing some. Do you see scope for the pair to reach 125.00 in the near term?

USDJPY – like the other yen crosses – is facing an increasingly difficult ascendance. The Yen crosses were driven ostensibly by the BoJ’s efforts to devalue the currency. They were effective, but they have seen their influence wane as they level off and the market weighs the fair value of traditional carry trade pairs that provide historically low levels of yield. Should there be a move across the market to pullback on excessive risk positions, the Yen crosses would quickly be swept up in the effort. USDJPY would certainly be the best of the Yen crosses to hold back the tide, but it would succumb as well. Between the greed of modest yield growth from the Dollar against the fear of a capital wash on carry unwind, ‘fear’ wins out.

The RBA has reiterated its intentions of cutting rates further. Do you see it moving next April? If so, how low do you expect the AUD/USD to go?

Overnight swaps are pricing in a 41 percent chance of an April 7 rate cut. However, they were also pricing in something similar heading into the March decision to hold. The RBA is certainly leaning dovish with rhetoric, but I don’t think they are anxious to move quickly. The last statement noted they were comfortable waiting to see how the February cut is passed through. It is likely that that influence has yet to be absorbed in their mind, and short of a serious slump in Chinese data or dramatic rally in the Australian Dollar, they will be reticent to move. If they did cut rates though, we would probably break below 0.7500. The February cut led to a remarkable drop that was quickly erased. Yet, with the Dollar in contrast and moving closer to its hike, the contrast would likely get to traders.

As for right now, could you tell me which will be the first three banks to rise interest rates? And when?

The first three central banks – amongst the majors – to raise rates will be the Fed, the Bank of England and RBNZ. Exactly when depends on the timbre of the data moving forward; but if current conditions are projected forward, I suspect the Fed will move in June, the BoE in the fourth quarter of 2015 and RBNZ in the first quarter of 2016.

Is Greece a ECB's client or member?

Greece is a member of the ECB like all other Eurozone members. However, like the political and economic union, the country is running afoul of the requirements that are in place to ensure the system remains stable. The country is in a very troubled position, and maintaining the same level of direct access could risk spreading a contagion. Given the credit rating of the country and banking system, the country already doesn’t meet the minimum threshold for collateral, but exceptions have been made. At a certainly level though, the risks cannot be justified.