By Zac, CountingPips.com
Today, I am pleased to share a forex interview and market commentary on this week’s major events and forex trends with quantitative analyst at DailyFx.com, David Rodriguez. David’s specializes in statistical studies in currency trading markets and algorithmic trading systems for the Managed Accounts Programs offered by parent company, FXCM.
* What do you think in the very short term is the main theme (or themes) in the Forex markets?
The major theme is thus far whether financial ‘risk’ markets can continue to hit lofty highs or whether an early-week pullback is the start of a larger correction. Given record 
correlations between the US Dollar and the US Dow Jones Industrial Average, Gold, Crude Oil, and other key risk barometers it will be critical to watch the next moves.
* The ECB followed through with its interest rate increase last week for the euro zone with more likely to come over the year. Portugal also looks likely that it will need a bailout for its debts. Do you think we could see these lingering sovereign debt issues put a dent in the European currency’s strength going forward?
The lack of market reaction to the Portuguese bailout suggests that markets had already discounted the arguably inevitable bailout for the Euro Zone’s 18th largest economy. Yet the key risk for the euro is whether sovereign debt crisis contagion will spread to similarly-indebted Spain. Initial estimates for Portugal’s bailout leave the amount of loans necessary roughly at the same capital outlay for Ireland. Yet as the Euro Zone’s fourth-largest economy, Spain would likely stretch EFSF and ESM funds beyond their limit and truly threaten stability in the single currency zone.
* The Japanese Yen showed a bit of strength at the end of last week after the recent steep selloffs. Do you feel this is likely due to profit-taking in the short-term? Do you think Yen weakness has more room to run over the long-term?
The Japanese Yen’s correlation to broader market ‘risk’ remains as high as ever. Thus we will need to watch for the next moves in the US S&P 500 and broader ‘risk’ to gauge whether the JPY can continue to recover across the board. The most recent pullback in stocks has led to similar corrections in the USDJPY, and we can expect similar declines if the S&P 500 continues lower.
* The UK consumer price index was on the economic release schedule this week and failed to live up to estimates of the annual inflation rate reaching 4.4 percent. With higher consumer prices in the UK, do you feel the bank of England is likely to be next in line to raise interest rates?
The Bank of England has expressed little real concern on rising CPI inflation, and a below-forecast print effectively sunk GBP interest rate forecasts. Overnight Index Swaps now predict that the Bank of England will raise interest rates by a relatively meager 58 basis points in the coming 12 months—down significantly from the 85bps priced in last week. The sharp correction has been a major source of recent GBP weakness and could continue to weigh on the British Pound going forward.
* The Australian dollar has continued on its spectacular run, especially against the US dollar. Do you feel this currency keeps going higher or do you see anything that could potentially take the wind out of its sails?
The key for the Australian Dollar remains whether broader ‘risk’ continues higher. That is, the currency remains strongly correlated to speculative capital flows and whether or not equity indices continue to hit fresh highs will likely decide whether the currency can set further record peaks.
* The US dollar has continued on its bearish path against the other major currencies. Looking out on the horizon over the medium to long-term, what do you see that could be a catalyst for change in sentiment of the dollar?
The US Dollar has been sold across the board on record-low interest rates and strong financial market risk sentiment. If suddenly the US Federal Reserve sees the need to tighten monetary policy and raise rates, the Greenback could recover significantly. Yet this seems unlikely at this point, and the Dollar’s more likely savior would come on a substantial correction in broader financial market risk appetite.
Thank you David for taking the time for participating in this week’s forex interview. To read David’s latest currency analysis and trading strategies you can visit DailyFx.com.
