By Zac Storella, 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 that traders should pay attention over the next week?
We have cleared a lot of the big ticket scheduled event risk (like the NFPs, ECB and BoE rate decisions); and that will allow us to once again focusing on the bigger themes – 
which are always primary drivers. I think the risk-reward balance is always key; but now we can focus on a direct driver to one side of this equation. The European financial crisis is an ongoing threat to the global sense of investor risk. Set between the effort for expanding the EFSF, Greece receiving its next tranche of aid before running out of cash next month and the German/French vow to present an all-encompassing bailout effort; there is a clear possibility that we can finally get some resolution (whether that be relief or confirmation of a crunch).
Q: Do you feel that the recent euro rally is due to extreme oversold conditions and will be ultimately short-lived or could we see more of a sustained rally if all the euro countries accept to the new EFSF funding agreement?
The euro’s climb to this point was certainly a factor of the currency finding itself in a heavily oversold position. We have seen suggestions of possible progress under the right conditions; but the market is naturally a skeptical place right now – especially when it comes to matters of the Euro-region’s health. The expansion of the EFSF program would offer a boost; but the timing of its implementation next to Greece’s official default and possible bank-level troubles will be exceptionally important going forward.
Q: On a technical basis, what do you see as the important levels to watch on the EUR/USD going forward?
For resistance, if we are able to surpass the 1.3700 level; it would open the door to continuation on a week-long rebound – possibly adding a feeling of semi-permanence to an otherwise temporary correction. From there, 1.4000/3950 will be the net meaningful line in the sand for bulls to contemplate. As for support, we have a possible ‘shoulder line’ on an inverse head-and-shoulders pattern at 1.3400 (which was a meaningful support level previously in a big 50% Fib and key trendline break). From there, we just take out this month’s lows at 1.3145, beyond which the floor gives way.
Q: What do you think is the endgame for the euro? Do you think there will inevitably be a breakup of some kind or will the Eurozone leaders be able to pull this together with all countries in tact?
There is the distinct ability for policy officials to ‘change the rules’ on the Euro concept; and therefore, they can adapt the investment perspective to ensure foreign investment keeps finding its way to the region. A Greek default is all but assured now; but what remains to be seen is what preparation they will have in place to keep the hit from spreading to the banking sector (especially given the global slide into financial and economic troubles). The most probable, worst-case-scenario at this point is one of the EU members deciding to leave because the austerity demands are too much to deal with.
Q: The USD/JPY has been trading in a very tight range for roughly two months now around between 76.00 and 78.00. Do you see any catalyst upcoming that might be able to ignite a breakout of this range?
Between the US dollar and Japanese yen, there is no immediate carry benefit, stimulus is extremely lax and they both stand as a relative safe haven. This is a balancing influence that just happens to occur an extreme for the pair (and that extreme is held in place by the store of value appeal the yen is offered through its deflation). We could say a shift in rates or key reversal in growth could offer a drive; but those aren’t probable outcomes for the next 6-12 months. The most probable catalyst with a real influence would be intervention on behalf of the yen. ‘One-off’ efforts to dump yen simply won’t do it. We need something that is consistent – something akin to what the SNB is doing.
Q: The Swiss franc/Euro has been effectively taken out of play by the Swiss National Bank and their peg to the Euro at 1.20. Are you surprised by the success of this policy considering the past SNB failures of intervention and if there is a turn for the worst in the Eurozone, could we expect to see investors pile into the Swissy as a safe haven?
I’m not surprised that the 1.20 floor has held up; because they have essentially vowed unlimited amounts of money to the cause of keeping that benchmark in place. However ‘success’ is a word that I would be hesitant to use here. Keeping this level in place has been quite expensive; and it will continue to be. Bearish speculators will not be major players here for some time as there just isn’t enough room to run when they dive in; but there will certainly be those market participants that aren’t looking to profit on the exchange rate risk, rather they will want relative safety in the European region. That will act as an anchor as long as risk aversion is a prevailing wind.
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 or follow him on twitter at http://www.twitter.com/JohnKicklighter.
