We are pleased to share a forex interview on this week’s major events and forex trends with the senior currency strategist at DailyFX.com, John Kicklighter. John specializes in combining fundamental and technical analysis with money management. John authors a number of regular articles forDailyFX.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.
1) What is expected from the British rate decision? Will we see an early rate hike, or a big hint towards a near one? How will the pound react?
The BoE rate decision is highly likely to be a non-event – meaning no change to the benchmark rate, no alteration to the bond purchasing program and no accompanying statement to better illuminate their plans going forward. That said, if any one of these things is actually changed, it would likely be in favor of the pound as the pressure on inflation has been so prevalent. If it does fall short of the more volatile outcome; we will still see debate over the possibility of near-term rate hikes trickle in. This would be a more restrained driver however.
2) Will the rise in US bond yields, seen strongly this week, send USD/JPY higher? Or is the correlation broken?
The yield differential between the US and Japanese government bonds and swaps works shows a high correlation over the longer term. However, recently, that link has deteriorated somewhat. Underlying fundamental trends in general have eased off and the links between these different markets and currencies has suffered for it. This will not be a lasting deviation however. Once a clear drive in sentiment takes over again, we’ll see these connections firm back up.
3) What are the chances of defaults for senior bondholders of Irish banks, and how does all the talk about it move EUR/USD?
If anything, the Irish banks will not default on their debt; rather they will give senior bond holders significant haircuts. This has been a proposal already offered up by the Finance Minister. A default would be a extremely painful for the euro; a haircut would be far less so because it is generally expected. That said, speculators are distracted by the possibilities in the March EU summit, so this particular topic probably won’t cause many waves in the immediate future.
4) Where will the rise of the Swiss franc stop? How does the relative stability in Egypt impact the currency?
The franc is a safe haven like the dollar and yen; but this particular currency’s appeal is very specific. It is seen as the alternative to the euro whenever the Euro-Zone’s health is called into question. If the EU’s open ended promises keep the market on hold until the summit confirms or denies their ability to agree on real fixes; the euro could slowly stabilize and pull the franc down with it.