We are pleased to share a forex interview on this week’s major events and forex trends with the quantitative strategist at DailyFX.com, David Rodriguez specializes in statistical studies in currency trading markets and algorithmic trading systems for the Managed Accounts Programs offered by parent company, FXCM. He holds a degree in Economics from Williams College with heavy emphasis on quantitative methods and began trading financial markets in the tech boom and bust of 1999-2001. Since then, David’s primary focus has shifted from equities to currency markets, but he continues to trade futures and futures options on a broad range of asset classes as well as currencies.
1) What do you expect from the upcoming FOMC meeting? Will we hear a more hawkish statement, at lease regarding no “QE3”? Or will the message remain cautios?
I think it’s fairly likely that the US Federal Reserve leaves its statement mostly unchanged through their coming meeting. The Fed continues to battle with two opposing but similarly compelling arguments to leave policy as it stands. Recent US Nonfarm Payrolls and Initial Jobless Claims data suggest that the domestic labor market continues to improve, but the pace of job growth has thus far been inadequate to make a significant dent on US unemployment and underemployment. Such underwhelming labor market growth supports calls for further monetary policy accommodation.
On the other hand, fast-rising raw materials prices threaten to derail price stability as goods-producers pass costs onto consumers. The Fed has made it clear they set policy on outlook for Core Consumer Price Index inflation””excluding food and energy. Thus we would need to see a material shift in said measure to really force the Fed’s hand. Weak employment figures and an upward bias to inflation forecasts leave risks roughly balanced through the foreseeable future.
2) How do you think the earthquake in Japan will impact USD/JPY in the next week, month and quarter?
To gauge the earthquake’s likely effects on the Japanese Yen, we look back to a similar episode in 1995 following another hugely disruptive natural disaster. It was after earthquake that the Japanese Yen rallied sharply and hit record-highs against the US Dollar. Traders attributed repatriation flows as the driver behind JPY strength. We cannot know whether such flows will prove similarly powerful in more modern times. Yet the earthquake’s immediate effects on domestic financial risk sentiment is clear, and such reduced risk appetite could force many traders to close carry trade-linked JPY short positions. We subsequently remain bullish the Japanese Yen in the coming week, month, and quarter. Yet it will be critical to watch coming weeks to judge whether it has any lasting effects on economic expansion and, similarly significantly, investor demand.
3) The Euro is torn between the expected rate hike and the debt crisis. Will one of these forces take EUR/USD out of the current range? And in which direction?
It is very difficult to reconcile bullish euro zone interest rate outlook with palpable risk of further sovereign debt crises. The very recent EU summit produced surprising results in an expansion of the European Financial Stability Fund and a sweetened bailout package for Greece. Yet there is still little way to tell whether Portugal will be able to fund its pressing cash needs without EU support. We will need to take a wait-and-see approach with sovereign debt crises and adjust through shifts in developments.
All the while, interest rate expectations have improved significantly and forced commensurate EUR/USD gains. ECB President Jean Claude Trichet made it clear that the central bank was responsible for price stability in the entire euro zone, not limited to periphery nations mired in fiscal crises. While inflation continues to rise, we can expect the ECB to continue tightening monetary policy. Yet it is difficult to divorce this entirely from situations surrounding Portugal, Spain, and other countries. Will the ECB really hike interest rates if financial markets tumble on continued fiscal stress? Time will tell, but for the moment interest rate outlook has outweighed fiscal crisis as the top driver of short-term EURUSD trends.
4) It seems that the expectations for the rate hike in Britain, which pushed the pound higher, have faded away. What awaits GBP in the next few weeks?
Interest rate expectations for the Bank of England have pulled back in the past two weeks, but the real risk to the British Pound lie in overextended bullish positioning. CFTC Commitment of Traders data recently showed that Non-Commercial traders””typically speculative in nature””hit their most net-long GBP against the US Dollar since the pair traded above 2.00 in 2007. We have since seen positioning and price pull back from recent extremes, and a continued shedding of long positions could only force further declines. The next GBPUSD steps will likely set the tone for subsequent weeks of price action.
5) The events in the Middle East aren’t in the limelight anymore. They have pushed USD/CHF lower. Is the pair expected to rise? Will a fresh round of violence send the pair to fresh new levels?
Natural disaster in Japan has caught the media’s attention at the expense of news coverage in the Middle East. That hardly signals that problems have gone away, and in fact recent news of spreading protests in Saudi Arabia underline that the situation remains tense and safe-haven demand for the Swiss Franc is unlikely to fade. That said, the other side of the USD/CHF””the US Dollar””seems to be ready for an important turnaround through the foreseeable future. We would likely favor playing CHF strength against the Euro and British Pound, as shorting the US Dollar at these depressed levels is a difficult proposition.
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