By Zac, CountingPips.com
Today, I am pleased to share our latest forex interview on this week’s major events and forex trends with John Kicklighter, Currency Strategist at DailyFx.com. John specializes in combining fundamental and technical analysis with money management and has trading experience in spot currency, financial futures, commodities, stocks, and options. In his analysis for DailyFx, John’s regularly reports on G10 fundamental forecasts, global risk sentiment and carry trade analysis.
Q: In terms of overall forex market impact and direction, what do you feel is the most important event or theme to pay attention to for the week?
For the coming week, I think the same issues that we have seen over the past two or three weeks will still hold their influence. Given the market’s deference to the possibility that we are seeing the beginnings of a global financial event; that is where our attention should be maintained. The signs of a worldwide crisis are not as blatant as many 
believe. A mere slowdown in economic activity is not enough to instigate general panic. We need to see trouble further escalate if fear genuinely takes hold. The next step in this process is likely to be a further deterioration in bank-level liquidity and cross board funding issues. Until there is further deterioration on this front – or policy officials further flush that fear out – the markets will likely struggle to gain permanent direction and volatility will settle down.
Q: The US dollar has been strong in the past few weeks with the markets being rocked by volatility and risk aversion. What do you feel is the outlook for the dollar in the near term?
The dollar has shown a remarkable ability to hold its ground across the board; but its general strength has been measured. If you look the Dow Jones FXCM Dollar Index (an equally weighted index of EURUSD, GPBUSD, AUDUSD and USDJPY); you see that the greenback was chopping for six days before tipping lower to start this new trading week. That traces back to the dollar gaining ground against high-yielding currencies like the Aussie and Kiwi dollar though risk aversion channels; but it has gained little to no direction against its core counterparts (euro and pound) or fellow safe havens (like the yen). To gain serious strength, you need to play to the currency’s real appeal – liquidity. Since it would be somewhat difficult to undermine the stability of the capital markets again or see the short-term yields on US assets rise this week, the dollar will defer to slow retracement in the absence of big headlines.
Q: With the Federal Reserve pledging to hold rates low until mid-2013, do you think this will effectively dampen any possible dollar resurgence over a longer term horizon?
Holding the US yield down for that long will certainly weigh on the dollar. That doesn’t mean that the greenback can’t bounce. Speculative counter-trends, short-term liquidity scares, unbalanced growth potential and a withdrawal from risky emerging markets can certainly offer a boost. However, it will be tremendously difficult for the dollar to maintain an advance if there isn’t the potential for returns to back it up.
Q: The Bank of Japan and the Swiss National Bank have both taken intervention measures recently with the SNB also toying with the idea of a euro-peg. Seeing that central banks have not made much headway with these interventions in the past few years, do you think either central bank will have success in weakening their respective currencies?
There is no hope for success in your standard intervention efforts. Central bankers are coming to terms with that fact. However, the powers that be have recognized this shortcoming and are trying to up the ante. The problem is that they are fighting dominant market flows and basic understandings of capital flow – which is a losing game. If the market wants a safe haven or specifically an alternative to Euro-exposure (without leaving Europe), they will go to Switzerland. If you are unwinding carry trade exposure to cover margin, you repatriate to the Japanese yen as it was the initial funding currency. You won’t effectively fight these well-capitalized flows. However, if conditions are level and they put up a surprise effort; they could carry the market further in their chosen direction. Between the two , the SNB’s effort goes farther as it effectively threatens near constant manipulation if they go for a target or target range.
Q: The Swiss franc has continued to be a major safe haven currency and trades at many historical highs. Do you expect Swissy strength to continue in spite of the SNB’s best efforts? Would we generally need to see a return to risk for franc weakness?
The franc will continue to gain ground until the risk aversion demand or Euro-area funding crisis eases up. That said, the SNB’s threat to peg the currency to a target or range against the euro can certainly hold it down for a time. A mandate for constant intervention to keep the franc stable is a force that few speculators would try to fight. That said, if you were promising to hold the exchange rate and your true intention was to look for safety, stability of price while you are sitting in a safe haven makes it even more appealing. We have to remember that not all pegs are successful.
Q: The Australian dollar touched its lowest level since March in last week’s trading against the US dollar. Do you feel that the Aussie is a relatively attractive buy at this point? At what level do you think the AUD/USD would have to reach to think the pair is now on a bearish path?
I’d be very careful of the Australian dollar. It is true that it has a much higher yield than its counterparts; but it isn’t just about current yield. Expectations for future yields comes into the equation as well. And, if we look at overnight swaps, we see that the market is certain of an RBA rate cut at the next meeting and is pricing in approximately 130 bps of easing over the coming 12 months. If risk appetite trends come back in a strong way, the market may overlook these issues or change their view. Alternatively, if uncertainty lingers or Australia’s growth and yields revert to the global mean of its counterparts, this outlook could become even more dovish/bearish.
Thank you John for taking the time to answer my questions in this week’s forex interview. To read John’s latest currency analysis and trading strategies you can visit DailyFx.com.
