Despite the statements of a “manageable” Grexit, Europe is not really ready for such a move and this could be painful for the euro, before and after the move, says John Kicklighter of DailyFX.
In the interview below, Kicklighter discusses the situation in Europe, the potential disappointment regarding more stimulus from the Fed, the relative strength of the Aussie 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 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. Now that QE3 is behind us, do you see the lack of QE3 expectations to aid the dollar? Or is additional stimulus towards the end of the year likely to weaken the greenback?
There is a question as to whether actual stimulus helps the capital markets and investor sentiment or merely the promise for more in the future. It is clear for the economy; but given the speculative nature of markets, expectations lead to adjustment in asset prices well before the actual event comes to pass. That said, there is a good chance that most of the QE3 wave has already been priced in and now we need to move forward to the next program. But where do you go after the Fed introduced a potentially ‘unlimited’ program? The concurrent Operation Twist program will expire at the end of this year, so the Fed can boost its MBS purchases to match the long-term Treasury buying. They could also broaden the type of assets they buy. This would certainly help keep rates low, but it carries less leverage with risk taking in the more speculative asset classes. Investors want to see the large $600 billion programs that whets traders’ appetites as a front-running opportunity. This is not it. Be wary of further advance on stimulus expectations….
2. A Greek exit is discussed loudly once again. Is Europe really ready for a “manageable” Grexit? Or will the euro plunge in such a case?
I think the best gauge of a Greek exit from the Eurozone was when policy officials (Rehn, Juncker, etc) switched from a stance that ‘it will never happen’ to one more along the lines of ‘it isn’t preferable, but we can manage if it does occur’. The probability of an exit grows as it becomes clear that the country needs more than additional time, it needs far better rates or a significantly large enough influx that they can truly jump start the economy to eventually pay off these sizable loans. There is a significant value in keeping Greece in the fold, but the cost is starting to slowly overtake that value threshold. Is the Eurozone ready for such an exit? No. And, unless they signal that it is going to happen ahead of time and make it a transition that can be done over years (it took years to integrate), then they never will be ready. If they telegraph a breakup, the euro would plunge before the exit breakout; but expectations or reaction, the euro would be hurt for it.
3. Japan is replacing its finance minister. Does this imply fresh intervention? In general, can Japanese authorities launch a successful forex intervention?
A new Finance Minister does not necessarily mean that the government will dive into fresh intervention. Azumi was an ardent proponent of threatening the markets with yen selling, but he realize that constant action in the market wasn’t feasible (it would only further instill the belief that the Ministry doesn’t have a lasting influence on exchange rate policy). A new Fin Min will likely take time to familiarize himself with the position and have a difficult time enacting bold policy with the new job. Furthermore, this transition is occurring before a possible, near-term election call. That being the case, it is even less likely that he/she will be unable to embark on something dramatic. As for FX intervention itself – there have been very few instances where the effect has been sustained more than a week. There are next to no examples of it lasting for more than a month.
4. The British authorities are in search of a new governor. Could a new head make the BOE less dovish? Would an appointment of Canada’s Carney to the governor of the BOE change the picture for the BOE and the pound?
Though the BoE tries to run a more democratic policy group than say the RBNZ, the central bank head has a greater influence over the direction the authority takes. Mark Carney has suggested he is not considering making the transition from the BoC, but there is always the possibility that someone equally – or more – hawkish could fill the position. It would take a significantly skewed individual to truly change the course of Bank of England, however, given the general path they have projected and the forecasts they are working on. Furthermore, there is a considerable working relationship between the bank and government. The BoE is trying to supplement growth during fiscal retrenchment, which would be disrupted by a sudden, hawkish change.
5. The Aussie continues to hold on at high levels despite tensions between China and Japan and ongoing evidence of Chinese slowdown and a slowdown in mining. Is Swiss diversification behind this relative strength? Something else?
The SNB’s efforts to diversify their holdings (a necessary, second step following their intervention effort) no doubt has some level of influence here. In general, central banks have shown considerable interest in Australian debt given its liquidity, yield and AAA status. There is further interest, however, through fixed investment (putting capital into the mining and resources industry) as well as general investor interest in the country’s government debt. This is an offsetting flow. However, a slowdown in China and the rest of the world can undermine these factors (raising the need for liquidity on hand). If strong and clear risk aversion kicks in for the capital markets, carry unwind will undermine the Aussie dollar on all levels – speculative, long-term investment, corporate and even central bank diversification.