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Which countries are the key to the European debt crisis? How far off is a rate hike in the UK? Which yen pairs are interesting to trade?  Answers to all these questions and more are provided by quantitative analyst David Rodriguez.

David Rodriguez is a quantitative analyst for  DailyFX.com, specializing 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.

What are your expectations from the upcoming FOMC meeting? After the dust settles from the first ever press conference, which direction is the dollar likely to take?

This is the all-important question, and frankly it is difficult to establish a clear US Dollar bias post-FOMC with so much on the line. The first question is fairly simple: will the FOMC allow QE2 to run its course and end in a few short months. This is the second-to-last meeting before the scheduled end for the controversial program, and the Fed will almost certainly need to address whether it plans to extend measures beyond schedule.  The second has more to do with Fed forecasts on future growth and expectations of future monetary policy tightening. It should be especially interesting to watch what happens in the first-ever post-FOMC decision press conference with Chairman Ben Bernanke.

The S&P credit warning for the US and the approaching fiscal debt ceiling pose risk for the US. Do you think that a default in the US is something we should worry about? Or will the politicians eventually sort it out?

The debt ceiling has been of no legitimate concern to markets because it is highly unlikely politicians continue this game if it poses significant risk of default. This seems to be a game of brinksmanship between Democrats and Republicans to see exactly how much each party can extract before agreeing to the essentially procedural vote.

In Britain, inflation has eased and the rate hike seems to be pushed back to later in the year. Do you think that the MPC could totally avoid a rate hike in 2011?

The recent Bank of England interest rate decision disappointed many GBP bulls, as the hawkish camp within the MPC seems unable to gain ground. At their peak, interest rate traders were pricing in as much as 92 basis points of BoE rate hikes in the following 12 months. Those expectations have literally halved to a paltry 45bps at time of writing, and we really only seeing markets price in rate hikes in Q4, 2011. The net result is to remove a key pillar of previous GBP support, and we may need to see an important pickup in rate expectations to see it recover against a broad range of counterparts.

In case Greece default, do you think that the Euro will plunge? Or are the markets already pricing this possible event, with the Euro ignoring it, as it does now?

The question with Greece, Ireland, and Portugal is whether sovereign debt risks are enough to destabilize the much-larger Spanish and Italian economies. Greece’s recurring debt issues suggest that initial bailouts have been far from enough to fix all ills. A restructuring seems almost inevitable, and the real question is whether it will shake confidence in Spain and Italy’s ability to repay its sizeable debt loads.

Japan underwent a major catastrophe, that met an already struggling economy. Yet the yen seems rather stable. Do you see a weaker yen in the future?

The Japanese Yen remains the second-worst performing currency of the G10 on a Year to Date basis, and I expect the JPY to continue to weaken against all except the US Dollar amidst strong rallies in financial market ‘risk’. The USDJPY continues to trade lower on broader US Dollar weakness. Yet pairs such as the AUDJPY and EURJPY continue to test fresh peaks as the US S&P 500 hits multi-year highs. It will be important to continue monitoring equity markets and make JPY forecasts accordingly.

 

 

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