'Central bankers are blowing heavily into asset bubbles' - 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.

We have several major central bank meetings this week. Which one do you think can have the biggest impact on the market?

While there was good short-term potential for the RBA and BoC rate decisions given that they both surprised to different degrees with rate cuts at their previous respective meetings; the follow through they would generate would ultimately be limited. To hold or cut rates for an already dovish central bank necessitates limited change in speculative positioning. So, while there may be good short-term volatility, trend capacity would be limited. In contrast, the ECB rate decision is truly trend worthy. While they announced their QE program at the January meeting, we expect to find more detail at this meeting. The Euro, European equities and government bonds have been pricing in an open-ended program for some time, but there is more juice to squeeze from this fruit.

Do you think these events will provide new episodes of the currency war?

There is a lot of fallout arising from the excesses and imbalances caused by the stimulus we have seen to this point – and additional accommodation furthers the net downside effect. The impact from smaller central banks like the RBA and BoC on the global financial pictures in more ancillary to the larger central banks. The ECB’s efforts have already claimed the SNB as a victim and many believe the Danish central bank may succumb as well. The PBoC’s rate cut over the weekend may signal a failing effort to keep the ship steady and a move towards a more expansive effort. Bigger picture, stimulus has driven rates of return to generational lows forcing speculators to try to keep up to benchmarks like the S&P 500 and encouraging excessive risk exposure along the way. Central bankers are blowing heavily into asset bubbles.

What is your guess in NFP and unemployment rate numbers? Why?

The consensus for the NFPs and unemployment rate amongst economists polled by Bloomberg is 235,000 jobs added and a downtick to 5.6 percent unemployment. I think the number will be 257,000 (the average of the past year) and agree with the jobless rate view. What is important from this data is not the change from month to month though but rather the bigger trend. These headline labor readings have shown substantial improvement for a number of years now. To have a more profound influence on monetary policy, some of the underlying statistics from the data needs to show the same progress.

Last week US CPI hinted that a moderation in oil prices weakness would lead to an inflation closer to Fed targets; in the case the NFP shows a strong number, do you think the FOMC will find reasons to hike rates in June?

We are seeing much the same thing in developed world inflation trends – core figures that are substantially more robust compared to the headline figures that are heavily influenced by volatile commodities (energy and food). A moderation of these segments – rather than a complete reversal – would probably do the best to support the hawkish view for monetary policy. A smaller allocation of earnings to ‘necessary’ items frees up discretionary spending which does more to charge economic expansion and ‘good’ inflation. From the FOMC’s perspective, the maximum employment mandate for policy decision is likely already met (6.5% percent was the target offered back when the Fed was using targets in the Evans Rule). What is missing is inflation. However, there is a good foundational measure of inflation pressure in the NFPs data in the form of earnings. If this continues to build, we are a big step closer to a June/July hike.

Will the EUR/USD touch parity in the short term? What is your line in the same for the downside?

While I do think there is a good probability that we reach parity on EURUSD in the medium-term (3-9 months), I don’t expect it in the short-term (next few months). Considering how far we have come in the past 9 months for the pair, we have priced in a very dovish ECB, a Fed contemplating rate hikes and renewed existential concerns for the Eurozone. These are still issues, but a lot has been priced in and each driver has tempered flare up risks somewhat with hard time frames pushed back. If/when we close in on the Fed hike, should Greece’s situation degrade once again or if broader risk aversion washes over global financial markets; we can will likely find the next thrust towards 1.0000.