ECB Next Move: 'Not a matter of IF, it is about WHEN' - Nenad Kerkez, Admiral Markets

NENAD KERKEZ
PROFILE
• Current Job: Analyst and Full Time Trader at Admiral Markets
• Career: Holds a MSc Degree in Economics at the John Naisbitt University (formerly known as Megatrend). Works as Senior lecturer and market analyst for Admiral Markets

View profile at FXStreet

Nenad Kerkez is an analyst and trader who has been in the market since 2008 and works closely with Admiral Markets as their Head Lecturer and Market Analyst. He is well known in the FX Community, ranking in the top 10 traders and analysts in the Forex Factory High Impact Members Ranking.

Nenad covers over 25 currencies on an intraday basis and has a Masters in economics. He also developed CAMMACD TM, a proprietary trading and analysis strategy. Further, he is the co-founder and head of Elite Currensea Trading, an educational website for currency traders.

Do you think the ECB will announce more QE in their next meeting on Thursday? Or at least, will Draghi talk down the Euro?

I presume that the meeting will be important for investors as it is only a matter of time WHEN ECB will make another move. I think that it is not about whether it will make a move or not , it is WHEN? The main role of every central bank is to ensure financial stability. ECB is aiming for less then 2 % inflation. Last week’s data showed continuing weakness in prices and inflation is currently negative -0.1 % which is not encouraging data for investors. In economic terms we use the term “Deflation” to define a negative inflation. Deflation usually happens when there is a shortage of money which increases the value of the money thus reducing prices. It has a lot of negative effects (supply of goods exceeding the demand for those goods, difficulties in paying off debts for govt and households etc.)

To be honest I am not sure that ECB will go with further easing on next meeting. They are closely monitoring the oil and Chinese markets too. The immediate effect of QE program is weakening the exchange rate. Weakening exchange rate can also happen in a different way – during news conferences when 3rd parties (investors) act as ECB conduits effectively causing the EUR sell off due to different QE cues and dovish Draghi. As we could have witnessed many times so far Draghi is very good in talking down the EUR so we might see it happening again.. 

Is there any way the EURUSD doesn't climb to 1.18-1.20 levels before Christmas if the ECB doesn't act this week?

My outlook for EURUSD is still bearish MID TERM but we should be prepared for possible rallies SHORT TERM. I have published my views on EURUSD lately and we could see both buying into dips and fade the strength moves. Fading the strength is effectively similar to selling into rallies but it is more pronounced as it spills the main sentiment over the exchange rate. (strong fades are done by institutional traders not by retail)

It will depend from a lot of FUNDAMENTAL factors but TECHNICALLY it is still bearish mid term.

What about the USDJPY? The BoJ seems to be in a similar position to the ECB. Do you think they will release more QE in their next meeting?

Similar to ECB, the BOJ aims for 2 % inflation target. Meanwhile, we have witnessed a dip in Japanese stocks, but if you have been paying intention to latest Kuroda’s comments it has been unlikely that the BOJ will announce fresh round of QE which was also stipulated by finance minister of Japan - Taro Aso. However the big risk to Japanese economy is weakness in emerging markets, and higher US interest rates. BOJ definitely needs to counterbalance technical recession and deflationary pressures by raising purchases of exchange-rate funds and increasing monetary base which would be mainly allocated to risk assets and ETFs. But although more QE adjustment is needed, I don’t expect it now. I expect that BOJ will continue with the current program..

With regards to the GBPUSD, should we focus only on technicals now? What's your forecast for the pair in the Q4?

If you have read my coverage of GBPUSD, you could have seen that I predicted a 100 pip bounce after U shaped bottom. We are currently in the buy into dips mode with the latest V shape reversal within the context of U shaped bottom. From the swing perspective technicals are suggesting long trades. 

Unemployment in UK dropped to 5.4 % in September which has been the lowest rate since 2008. But the problem is weak inflation which still flat despite the economy doing pretty well. So the focus shifts to technical levels indeed.

Although the monetary divergence between UK and US still favors the USD for Q4 I think the pair will range between 1.5300-1.5600 with a possibility of 1.5800.

Will the dollar weakness prevent the Oil bears of taking the WTI price onto new year-lows before this year ends?

This question needs a bit longer explanation, so lets start from the beginning.

West Texas Intermediate (WTI) crude oil prices have been in decline since the middle of 2014 and this has largely been due to excess supply and flattening demand of oil. In addition, a strengthening USD has led to a weakening in commodities prices in USD terms. Nonetheless, even with potential USD weakness in the near term, oil prices should stay lower for some time as the world currently has excess oil production of roughly 2 million barrels per day. This excess supply of oil may continue for some time due to the following factors:

- Fracking technology – has enabled the extraction of oil from resources that were previously un-economic. In particular, this technology has enabled the US to increase its production of oil to over 9.5 million barrels per day (2015) from 5 million barrels per day (2008); increasing world supply by 5%. This has reduced USA’s dependence on importing oil.

- OPEC ineffectiveness - Previous oil price falls have been keenly countered by OPEC, whereby they cuts quotas to its members, limiting their production and causing the price to rise through reduced oil supply. OPEC was largely placing pressure on Saudi Arabia, the largest oil producer amongst the OPEC members, to act as a swing producer and cut its quota to reduce excess supply of oil globally. Saudi Arabia failed to respond to such pressures, knowing full well that they are the lowest cost producer of oil, enabling a war against oil suppliers as they battle against to retain market share and try to outprice high cost producers. 

- Flat oil demand – Slowing economic growth along with energy efficiency investments in renewable energy and more efficient motor vehicles has permanently reduced demand for oil in most of the developed world.

- Russia’s dependence on Oil production – The third largest oil producing nation have tried to maintain the shortfall in their government budget by pumping out more oil. Increased production adds to the downward pressure on crude oil prices.

- Iran’s oil supply to return online - Sanctions against Iran were imposed due to its nuclear program, leaving restrictions on its oil supply to the world. Despite being stymied by US and EU sanctions, Iran is still able to produce 2.7 million barrels per day, of which 1 million is exported. The un-exported 1.7 million barrels meet domestic demand, but a large proportion is sent to storage. Confirmation of Iran's compliance to dismantle its nuclear facilities and reduce its uranium supplies should lead to the lifting of sanctions. Iran could have immediate impact on oil prices by putting its estimated 35 million barrels of stored oil on the market the day sanctions are lifted. 

The major oil producers have done little to reduce oil production since 2014, and they are unlikely to consider cutting output any time soon. The USA, Russia and Saudi Arabia each have different reasons to continue high output, but all three are just stockpiling oil in the current environment. Add on the inevitable return of Iran and the prospects of the 2 million barrels per day of excess oil production globally seems impossible to reduce. On that basis, excess supply prevails and should keep the price of oil low for some time, irrespective of whether the USD weakens