By Zac, CountingPips.com
Today, I am pleased to share a forex interview with currency analyst Christopher Vecchio from DailyFx.com on the latest currency market major events and trends. Christopher studies fundamental analysis of the foreign exchange markets by examining the interrelationship between geopolitical events, macroeconomic trends, and finance while also incorporating technical analysis into his research in order paint the most complete picture of what is occurring across various asset classes in the short-term and medium-term.
What do you think at the current time is the main theme (or themes) in the Forex markets?
“Cautious optimism” would be current theme for not just the Forex market, but financial markets across the globe. The news last week that the European Troika – the European Union, the European Central Bank, and the International Monetary Fund – would extend another tranche to Greece certainly lifted investor sentiment in regards to the sovereign debt situation in Europe. I think that this is most easily discerned due to the fact that Greek yields have fallen fairly consistently since May 23. The trend of “cautious optimism” is not just denoted by the drop in yields, however: an equal-weighted basket of currencies, with the Australian Dollar, the Canadian Dollar, and the 
New Zealand Dollar (collectively known as the commodity currencies) in a long position against an equal-weighted basket of the Japanese Yen, the Swiss Franc, and the U.S. Dollar (collectively known as the safe haven currencies) shows that the markets are moving into the safe haven currencies. While the index has oscillated sharply since April 26 (the index’s highest point in 2011), it is lower now, and has been trending lower since last Wednesday. This suggests that while there have been brief intraday moments of optimism among traders, concern still remains. The near-term trend, at least for the next three months, is a flight to safety, and until there is some substantial proof that the two biggest weights on investor sentiment change – a struggling recovery in the United States coupled with a debt limit issue, as well as the sovereign debt crisis in Europe – traders will have to tread carefully.
There are a lot of important economic news releases scheduled for this week including interest rate decisions, GDP reports and employment releases as well as the Greece sovereign debt situation in Europe. Is there any one or two events you feel will have the biggest impact on the FX markets?
The European Central Bank rate decision on Thursday represents the most important event, in my opinion, this week. While there are three other central bank interest rate decisions, the market is clearly eager to hear what President Jean-Claude Trichet has to say at his monthly press conference following the meeting. The chance that the European Central Bank raises rates at their meeting this week is miniscule: in fact, the Credit Suisse Overnight Index Swaps show a -1.0 percent chance of a 25.0-basis point rate hike at the meeting on Thursday. Still, there has been much posturing by European officials for a hike in the near future, perhaps as soon as July. Jurgen Stark, a member of the ECB, called last week for a rate hike as soon as at Thursday, for example. That being said, President Trichet’s rhetoric will be key. However, a rate hike could stir further trouble for Greece, and certainly for other periphery countries that are facing
The Nonfarm Payroll Report released on Friday was a big disappointment as job creation came in much less than expected. Do you feel this most likely further dampens the dollar’s prospects against the major currencies?
No, in fact, I feel the exact opposite. A strong recovery in the United States boosts the market’s appetite for risk, and accordingly, a shift into riskier assets, such as other currencies and equities. However, the softer-than-expected figure – the actual number came in lower than the lowest estimate, according to survey figures – has spurred another move to risk-aversion, which, as the U.S. Dollar currently holds the title for the world’s reserve currency, is good for the Greenback. This of course begs the question of a third round of quantitative easing, but I think that’s an unlikely scenario to begin with; Federal Reserve policymakers have been lambasted for the ‘monetization’ of U.S. debt, and the purchases of U.S. Treasuries has added onto fears of another breach of the debt ceiling and thus inability to meet current obligations.
Looking out over the medium to long-term, do you see anything that could be a catalyst for change in sentiment of the dollar?
Only a third round of quantitative easing would further debase the Dollar. The general sentiment is that when Federal Reserve stops their purchases at the end of June, there could be a major rally in the Greenback, a scenario I expect. While the Federal Reserve will likely keep rates on hold for an ‘extended period,’ the continued monetization of debt is an unlikely scenario, in the near-term. Of course, if asset prices collapse, unemployment soars, and growth grinds to a complete halt, by the Fall, there would likely be talk once more of quantitative easing. Until more easing is announced, I believe the horizon for the Greenback is bullish.
The USD/JPY is back trading near the 80.00 level. After the earthquake / tsunami, we saw the Bank of Japan with other central banks intervene in the currency markets to sell the yen. Do you feel that we might likely see another intervention to boost the dollar versus the yen?
At this point in time, no, it is unlikely that there would be another intervention. While a weaker Yen is certainly beneficial to the Japanese economy – foreigners would have more purchasing power, and in theory, would purchase more Japanese goods – the past two interventions – the one in March following the earthquake, and the one in September as the USD/JPY pair breached the 83.00 exchange rate – did not ultimately work; the Yen is stronger against the Dollar in the weeks following such moves. Furthermore, I believe that given the tremendous problems that are arising elsewhere around the globe – debt worries in Europe and the United States, plus continued conflict in the Middle East and North Africa region – if the market dictates risk-aversion, the Yen will appreciate over the long-run, a trend we are in the midst of experiencing. A slew of strong data out of Asia, Europe, and North America would allow an intervention, but right now, with so many other problems occurring elsewhere, central banks are going to be more concerned with domestic issues. Then again, the actions of some of the world’s largest central banks have not been entirely rational, so an intervention could be an automated process once the USD/JPY pair exchange rate breaches a certain level.
The Canadian dollar has been especially weak over the past month or so against the other major currencies. Canada’s employment report will be released this week with early estimates of a 20,000 gain in jobs. Do you feel we could see a turnaround in the loonies fortunes in the next weeks to months?
While I am particularly bullish on the Loonie – the Canadian economy is the only advanced economy to have regained all of the jobs it lost during the recession, and thus the only economy that has created new jobs – the fortunes of the Canadian economy are directly tied to the fortunes of the American economy. This is most easily confirmed by the fact that the Loonie depreciated the most since the ADP jobs report last Wednesday. The fear is that if American growth slows, there will be dampened demand for oil – the number one exporter of oil to the United States is Canada. While in any other scenario I would project that adding jobs to the economy would likely boost the Loonie, unfortunately, the Loonie needs to wait and see what is happening in the United States before any further advances or declines occur. Positive data from the United States will translate into a stronger Loonie, ultimately.
Thank you Christopher for taking the time for participating in this week’s forex interview. To read Christopher’s latest currency analysis and trading strategies you can visit DailyFx.com.
