While recent indicators have been positive, the recent crisis in Europe is too strong for the world’s No. 1 economy. In the euro-zone, a rate cut seems likely, at least for easing the pressure for quantitative easing.
John Kicklighter of DailyFX discusses the crisis, the US economy, the status of safe haven currencies and more in the interview below.
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.
It is very likely that the ECB follows up with additional rate cuts moving forward. They have significant room to ease compared to counterparts like the Fed and BoE. However, this comparison will lead to another question: will taking our rate to near-zero have the same lack of effect for Europe as it has had for the US and UK? This is a very important question as easing has detrimental economic implications (higher inflation); so lowering the benchmark for an objective that is ultimately unfeasible could introduce more problems than benefits. That being said, European officials are looking for relief wherever it can readily be found (as the ECB, markets and governments are blocking many options along the way); and rate cuts are perhaps the most accessible tool at this point. Furthermore, from a political perspective; offering rate cuts can ease the pressure somewhat on the ECB to adopt an out-right bond purchase scheme that many believe can offer much-needed relief.
This is a big picture / small picture distortion. When you look at the month-to-month indicators, there are a few highlights that speculators (particularly the unflappable bulls) can point to as evidence that a recovery is underway. Yet, when we look at the bigger trends, it is clear that the global economy is slowing. In fact, in its semi-annual forecast update, the OECD lowered its GDP expectations for the 34 countries in its group from 2.3 percent to 1.9 percent for 2011 and 2.8 percent to 1.6 percent for 2012. Moving forward, the financial troubles that have spread outward from the Euro Zone and the sustained financial stress in the US and Asia will further exacerbate the economic troubles. The US economy is in no state to support the global community – much less pull itself out of its descent.
3. Since the intervention in September, the Swiss franc has distanced itself from the “safe haven” camp, yet Swiss bond yields remain very low. In a further escalation of the euro-zone debt crisis, will the franc weaken against a soaring dollar? Or rather rise as a safe haven?
We have a very direct relationship between the Euro and Swiss franc as capital that is in this region will typically flow from one to the other depending on what the level of risk appetite the market’s maintain at any given time. However, in the FX market, there are always alternatives when it comes to safety, high-yield and other thematic trades. When we set the franc next to the dollar, we have a very different picture. When Europeans are looking to transfer their capital out of the Euro Zone to avoid the crisis; they may move funds over to Switzerland because it is a well-known and safe haven for the region. However, in the age of global markets, investors that are looking to move as far away from the European sovereign crisis pull as possible will not favor Switzerland as the spillover of economic and financial troubles is too heavy. The US dollar is the standing reserve currency and therefore one of the few feasible alternatives to something as liquid as the Euro. And, while credit market troubles can cross the lines into the US, the level of separation and depth of its markets make it more stable than the Swiss system when conditions really start to fall apart.
4. The OECD suggested that the BoE will expand its QE program by another 125 billion pounds. Do you think this is on the cards? Will the bank act already in the upcoming rate decision next week?
The increase in the bond purchasing program back in October was a move to action for the Monetary Policy Committee (MPC). Previously, was significant discussion from the market, analysts, economists and others that the UK economy and financial market was heading into serious trouble as the government maintained its fiscal austerity track. Given Cameron and Osborne’s determination to reduce deficits (even at the expense of economic expansion), it is clear that the BoE will have to step in to fill the void. This is especially clear given Governor King’s repeated warnings that the United Kingdom is at clear risk of catching the Euro Zone’s cold. They may not move at the next meeting as they suggested that the 75 billion sterling they announced in October would take approximately four months; but the pressure will be on another hike in purchases sooner rather than later.
There are two general certainties about the Japanese yen (and more specifically USDJPY); regular economic data has extremely little influence over price action and standard intervention ultimately fails. The trade figures fit into a larger picture in which we know that economic strains are building due to the high cost of the yen, rates of return are extremely low and long-standing credit market troubles make for a difficult arena to move capital within. Between the US dollar and Japanese yen, we have two different safe havens. The yen appreciates when carry interest is unwound (much of it sourced from extremely cheap Japanese sources) and when we are looking for some level of return on our safety holdings (real rates of return in Japan have a slight advantage over the US). Yet, when the question of global instability is raised, we turn to whatever offers absolute liquidity (without thought to anemic yield) and that is for most intents and purposes the US dollar.