By CountingPips.com
Today, I am pleased to share a forex interview commentary on this week’s major events and forex trends with currency strategist at DailyFx.com, David Song. David studied macroeconomic policies under a visiting scholar at the Federal Reserve Bank of St. Louis while attending the Zicklin School of Business at Baruch College and incorporates both fundamentals and technicals in his analysis. David authors the daily briefings for the U.S. at DailyFx.com.
The Eurozone finance ministers are meeting later this week over the Greek debt crisis and hoping to head off the escalating problems while the US government is fighting over the raising of the US debt ceiling. Do you feel these two themes should be at the forefront of forex trader’s minds over the next few weeks and where do you see these issues heading?
Given the far-reaching implications of a U.S. default, we expect the government to reach a deal in raising the debt ceiling, and the European crisis is likely to take center stage 
over the coming weeks as the EU plans to implement new measure in an effort to stem the risk for contagion. As the group plans to empower the European Financial Stability Facility with the ability to participate in the secondary market, the impact of the broadened powers could have an adverse affect on the global market as policy makers move into uncharted territory. As Europe looks to monetize government debt, the next step could be to increase the lending capacity of the rescue fund, and the EU could be forced to increase its stake in the European periphery should the risk for contagion continue to materialize in the coming months.
On a technical basis, we have seen the EUR/USD pair make lower highs and lower lows since reaching almost 1.5000 on May 4th. Do you see the euro-dollar likely breaching below the significant 1.4000 support level on the view that the debt crisis will continue to drag on the euro?
Indeed, the EUR/USD continues to trade within a descending triangle, and the relief rally in the euro-dollar may come to a halt as the pair continues to trade below the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60. As the pair appears to be finding short-term resistance just ahead of the 78.6% Fib, the exchange rate may consolidate in the days ahead, and we may see a bearish breakout in the exchange rate as price action approach the apex. At the same time, the euro-dollar also appears to be trading within a downward trending channel after carving out a major top in May, and the technical outlook suggests we will see lower prices over the near-term as we see lower highs paired with lower lows.
Now that the United States QE2 program is winding down, do you think we have seen or will see any noticeable impact on the sentiment for the US dollar in the short-term due?
As QE2 comes to an end, with the Fed laying out a more detail outline of its exit strategy, we should see a shift away from risk-taking behavior, especially as global economy faces a slowing recovery. As the central bank starts to wind down its balance sheet, the reduction in monetary stimulus is likely to increase the appeal of the U.S. dollar, but the FOMC is expected to endorse it zero interest rate policy throughout the remainder of the year as it aims to stimulate growth. Indeed, the Fed is taking up a different approach compared to its major counterparts as we’ve seen central banks across the advanced economies start to raise borrowing costs, and the bearish sentiment underlying the U.S. dollar may linger as Chairman Ben Bernanke maintains his pledge to keep the interest rate exceptionally low for an extended period of time. As the central bank head continues to highlight the ongoing weakness within the real economy, market participants are still holding onto expectations that the committee will conduct another round of quantitative easing, and the greenback may struggle to find a clear direction until speculation for QE3 subsides.
The Australian dollar has been consolidating in a fairly tight range against the US dollar for the past several weeks with the upside being at the 1.0800 level. Do you feel there is the likelihood that we have seen the peak in the AUDUSD when it reached 1.1000 in May?
The Australian dollar has been in a phase of consolidation after breaching 1.1000 in May, and we expect the major top in the AUD/USD to hold as the fundamentals are just not there to prop up the high-yielding currency. In light of the recent comments from the Reserve Bank of Australia, the central bank looks poised to retain a wait-and-see approach throughout the remainder of the year, but there’s speculation that the central bank will have to lower the benchmark interest rate from 4.75% as the region faces a slowing recovery. As the RBA softens its hawkish tone, the mildly restrictive policy stance could be reversed over the coming months, and the Australian dollar remains at risk of facing headwinds in the second-half of the year as market participants speculate Governor Glenn Stevens to curb borrowing costs by more than 50bp over the next 12-months, according to Credit Suisse overnight index swaps. Although the AUD/USD has advanced all the way up to 1.0856 in July, the rally appears to have been a false breakout, and we should see a near-term correction in the exchange rate as risk appetite wanes.
The Swiss franc has continued to be the major safe haven currency and trades at many historical highs against the other major currencies. Is more Swissy strength inevitable due to the uncertainty in many of the major economies especially in the euro zone at the present time? Do you think it is safe to assume that the Swiss National Bank will avoid the intervention policy that we witnessed a couple years ago?
I am fairly bullish on the Swiss franc even as it trades at record-high against its major counterparts, and I expected to see a further advances in the franc as it benefits from safe-haven flows. As market participants scale back their appetite for yields, the swissy is likely to be the major benefactor amongst the majors, and risk sentiment should deteriorate further in the second-half of the year as the fundamental outlook for the global economy remains clouded with high uncertainties. In terms of a currency intervention, previous attempts by the Swiss National Bank to stem the marked appreciation in the local currency has been far from successful, and it seems as though the central bank will continue to refrain from jumping into the currency market as its earlier endeavors have failed to bear fruit.
As we are around the half-year mark of 2011, do you have any predictions for winners or losers over the coming second half of the year in terms of specific currencies and trends?
For the second-half of the year, the New Zealand dollar looks as though it will one of the best performing currencies as the Reserve Bank of New Zealand shows an increased willingness to lift the benchmark interest rate off of 2.50%. According to Credit Suisse overnight index swaps, investors see borrowing costs in the isle-nation increasing by more than 75bp over the next 12-months, and interest rate expectations should help to prop up the high-yielding currency as market participants weigh the outlook for future policy. Meanwhile, the British Pound may lag behind its major counterparts as the Bank of England continues to defy calls to lift the interest rate off of the record-low, and the slowing recovery in the U.K. is likely to dampen demands for the sterling as the central bank keeps the door open to expand its asset purchase target beyond GBP 200B. As some members of the BoE see a risk of undershooting the 2% target for inflation, the dissenting views within the MPC will continue to curb expectations for a rate hike later this year, and the sterling may struggle to hold its ground should we see a growing shift within the committee.
Thank you David for taking the time for participating and sharing your views in this latest forex interview. To read David’s latest currency analysis and trading strategies you can visit DailyFx.com.
