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Spain paid a dear price of heavy austerity for a small drop in its bond yields. A quick look at recent history tells us that the improvement in Spanish and Italian bond yields isn’t here to stay, explains John Kicklighter of DailyFX.  

In the interview below, Kicklighter discusses the options facing the Fed, British QE, the Chinese impact on the kiwi and more.

John Kicklighter is a currency strategist for FXCM in New York where he specializes in combining     fundamental and technical analysis with money management. John authors a number of regular articles for, ranging in topics from basic fundamental forecasts for the G10 economies and commodities to more complex subjects like the level of risk sentiment across the financial markets and the carry trade specifically.    John has actively traded since he was a teenager. His experience ranges from spot currency, financial futures, commodities, stocks, and options on all of these instruments for his personal accounts. John graduated from the Zicklin School of Business at Baruch College in New York with a Bachelors degree in Finance and Investment.John Kicklighter

  1. After the Fed extended Operation Twist, are there any other steps it can take apart from QE3?

There are a number of options open to the Fed – a few of the big-ticket items were mentioned by Chairman Bernanke. The central bank has floated the option of further quantitative easing, changing the deposit rate and using their communication of options to impact investor sentiment. However, through all of this, we continue to see the headlines and hear traders’ discussions revolve around ‘QE3′. This could be a sign that anything short of another outright QE program will be treated the same way as the extension of Operation Twist. If they really wanted to remove the stops, the biggest impact they could offer would come from a program that absorbed mortgage-backed securities to target a sector they are particularly concerned about (housing) and draw more unproductive inventory off of banks’ balance sheets to put towards new projects.

  1. Some Spanish and Italian bonds have resulted in somewhat better yields of late. Are markets becoming more confident, or is it just temporary?

Some of the yields have eased somewhat, but historically they are still extremely high and cannot reasonably be tolerated through the medium- to long-term. A good example of the improvement is the Spanish 12-month bill auction that pulled a rate of 3.918 percent versus the 5.071 percent from the last sale. That is a hefty recovery, but it is a step from a 15-year high and it comes at the cost of a €65 billion austerity plan announced by Spanish Prime Minister Rajoy. On one hand, these auctions are kept in check by domestic banks who have a stake in keeping down the sovereign rate to protect their own operating conditions. On the other, these rates generally pull back from extremes when outright ‘fear’ eases – like implied volatility readings. Yet, rarely do they permanently retreat.

  1. Inflation continues to fall in the UK. Do you think the BOE will introduce more monetary easing soon?

The Bank of England seemed to abandon concern about inflation before the figure actually started its exceptional pullback. History tells us that the MPC doesn’t act too hastily with expanding its stimulus program. In reality, the BoE’s effort is far smaller than its European and US counterparts. This program can’t meaningfully alter global risk appetite, and it probably won’t even fulfill a decent job of preventing the spread of a Euro Zone financial crisis. If conditions stabilize it will be the product of other central banks’ cumulative efforts or Euro-area officials’ efforts to clean up their own shop.

  1. How important is Chinese data for the New Zealand dollar?

Chinese data isn’t as important for the kiwi dollar as it is for the Aussie. Trade with the economic behemoth is substantial for New Zealand, but the raw materials the country ships are more staples than growth-dependent goods (agricultural commodities rather than metals and energy). That said, the Chinese docket is one of the few that can tap into underlying risk appetite trends. If the country’s data is altering the appetite for risk, the kiwi’s position as a primary investment currency will draw a clear reaction.

  1. It seems that the BOJ is limited in its ability to weaken the yen. Would the yen be much stronger without the Japanese QE and so called  “verbal intervention” by the BOJ?

It is difficult to gauge just how much impact the BoJ’s actual stimulus and warnings for more have actually earned for Japanese capital markets and the yen itself. We can clearly see that intervention efforts that have posted progress have been consistently and mercilessly hammered back. That could be that the market simply absorbs the opportunity as a good reason to jump in at an extended level. On the other hand, it may be a reflection of renewed risk aversion or a fresh wave of Japanese investor repatriation that overwhelms the limited move. I think the verbal intervention is overlooked, and USDJPY would be at this range even if the policy authority hadn’t put into place its recent stimulus program upgrades.