Job gains in recent months have been steady but probably enough only to “breakeven”. Prints above 200,000 are more likely to lead to a change in the unemployment rate given there is likely to also be adjustments in the labor pool, says John Kicklighter of DailyFX.
In the interview below, Kicklighter discusses the current mindset of the Fed, what could spin Japan’s currency weakening out of control and other topics that move markets.
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 DailyFX.com, 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.
1. Is the Fed expected to make any moves this time? What is already priced in?
The Fed made a considerable policy change back in December when it established outright purchases of Treasuries a party of its monthly stimulus effort and established economic targets for the continuity of its open-ended program (6.5 percent unemployment and/or 2.5 percent CPI). To these policy officials, this is essentially a self-sustaining program that can remain in place until goals are met or something dramatic happens. That means, we won’t be seeing any from the Fed in its regular meetings for a while. Speculation around monetary policy in the US will now focus on establishing the time frame for when the stimulus effort will be slowed and eventually stopped all together. That will generate greater interest in monthly employment figures, Beige book forecasts and the quarter Fed forecasts – the next being in March.
2. Non-Farm Payrolls figures have been steady in recent months. What levels would indicate a significantly faster recovery?
The market is well aware at this point, that the monthly changes have to sustain an impressive consistency (north of 150,000 new jobs net per release) to just ‘breakeven’. FX traders’ interest in the labor data currently lies in expectations for monetary policy to be unwound with genuine interest in relative growth levels a distant second. Therefore, changes to the jobless rate will carry more impact. That said, prints above 200,000 are more likely to lead to a change in the unemployment rate given there is likely to also be adjustments in the labor pool.
3. So far, Japan is enjoying a weaker yen without losing control or angering its peers too much. Could the yen weakening go out of control? Could the move impact Japan’s bond yields and remind us of Japan’s debt mountain?
Japan is dead set on driving its currency down and is about as close to admitting its intentions as we have seen a major economic player come in the recent past. The yen could weaken out of control under two scenarios. If risk appetite trends recovered all of a sudden, the demand for carry would find a currency that is extremely vulnerable on the short-side (another example of front running a government / central bank). That is unlikely for the near future however. A tangible escalation to the easing regime would be another way. The vows of 13 trillion yen in monthly stimulus injections doesn’t carry as much weight as many think because they are not actually in the market until 2014. If the new BoJ governor coming in decides to start upon his arrival in April, things may turn out different; but for now, there is a serious risk of short-term reversal. As for the JGBs, devaluing the national currency is a concern for external interests who may not see the BoJ buying offsetting a permanent capital repatriation loss. However, there is heavy domestic interest in the government debt and the potential for concerted buying from deep pockets like the BoJ and MoF will likely keep speculators involved and yields down.
4. Is there any chance that the euro-zone will join the “currency wars” and take some action? A stronger euro could hurt the chances of Europe growing and seeing “positive contagion” from the financial markets to the real economy.
There would have to be a substantive increase in the euro for the ECB to become involved in the currency wars. The likelihood that the central bank will have to embark on a further stimulus push is high, but not necessarily due to the exchange rate. If it does come, it will likely be in reaction to the recession and members loosing access to the debt market (paying rates they can’t sustain). That being said, the LTRO repayments are already whittling down the ECB’s balance sheet, which is a factor that will likely continue to push the euro higher.
5. The Canadian dollar has been hit by a more dovish BOC, even though the Fed maintains a far looser monetary policy. What will move the Canadian dollar in the weeks ahead?
Where the Fed’s loose monetary policy is well known, any sign of dovishness from the Bank of Canada comes as more of a surprise. With each small step towards taking on a more neutral and then dovish view on the monetary policy outlook, the Canadian dollar will lose strength. Slowing growth and tame inflation will be the guides for such a shift from a Governor (Mark Carney) who is already starting to put himself in the dovish mindset as he prepares for the shift over to the Bank of England mid-year.
Further reading: the previous interview with John Kicklighter: Volatility Likely to Pick Up in Early 2013
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