The euro is trading lower and will likely to be heavy towards the upcoming summit. But the euro’s problems are not limited to the debt crisis.
In the interview below, David Song of DailyFx discusses the euro, the hopes for the US in averting recession, the weight on the pound and other current fundamental questions.
David Song studied macroeconomic policies under a visiting scholar at the Federal Reserve Bank of St. Louis while attending the Zicklin School of Business at Baruch College, and graduated with a Bachelor of Business Administration degree majoring in finance. During his undergraduate program, David acquired a strong understanding of technical analysis from a former-president of the Market Technicians Association, and incorporates both fundamentals and technicals in his analysis. After starting at DailyFX, David authors the daily briefings for the U.S. Open as well as the Trading the News report. 
- Pressure is mounting on Europe to sort out the debt crisis “once and for all”. Is this indeed coming in the next weeks? If so, is this already priced in through recent gains of the euro?
There’s a lot of optimism surrounding the EU Summit scheduled for October 23rd, but the renewed efforts to address the sovereign debt crisis ‘once and for all’ may fall short of market expectations as the group struggles to meet on common ground. Indeed, German Chancellor Angela Merkel tempered hopes that the new package would solve all the problems faced by the euro-area, and we may see the EU make an attempt to buy more time as policy makers prepare for the G20 Summit in November. It looks as though market participants see little hope for a quick fix as the EU faces many unanswered questions, and the euro may continue to trade heavy over the week as the heightening risk for contagion continues to bear down on market sentiment. Beyond the debt crisis, the slowing recovery in the euro-area also dampens the outlook for the region, and we may see an increased reliance on the European Central Bank to address the risks for the region as the EU struggles to get its house in order.
- Recent retails sales numbers from the US, as well as some other indicators have given the notion that the US will escape a recession for now. What are the chances in your opinion, and how does this affect the dollar in the current market environment?
Given the recent batch of data coming out of the world’s largest economy, it seems as though the US will avert a recession for the time being, and we may see private sector activity continue to gather pace as the central bank takes additional steps to stem the downside risks for growth and inflation. There’s a relative small chance of seeing the U.S. slip back into a recession as the Fed maintains an accommodative policy, and it seems as though the FOMC will carry its easing cycle into the following year in an effort to encourage a sustainable recovery. However, the zero interest rate policy held by the Fed leaves little in the way of seeing the U.S. dollar trade off of fundamentals, and we expect risk trends to play a greater role in driving price action for the reserve currency as it remains a safe-haven for global investors.
- The pound managed to recover very quickly after the dip that followed the announcement of QE2 in the UK. Is this story behind us, or is the pound likely to face more downward pressure as the BOE performs the asset purchases?
After increasing the asset purchase program to GBP 275B, it seems as though the Bank of England is keeping the door open to expand monetary policy further as the central bank sees a growing risk of undershooting the 2 percent target for inflation. The slowing recovery in the U.K. certainly endows the BoE with the flexibility to further stimulate the ailing economy, and the MPC may continue to talk up speculation for more quantitative easing in an effort to stem the risk of double-dip recession. Speculation for additional monetary stimulus is likely to bear down on the exchange rate, and the British Pound may trade heavy throughout the remainder of the year as the BoE maintains a dovish tone for future policy.
- There has been talk about a “Swiss style” intervention in Japan. Do you think that it is on the cards?
There have been recent rumors that the Japanese government will unveil a new plan to stem the marked appreciation in the exchange rate, but the likelihood for a ‘Swiss style’ intervention remains fairly slim as the Bank of Japan weighs alternative measures to dampen demands for the low-yielding currency. In light of the recent comments from the BoJ, it seems as though the central bank will look to increase its asset purchases rather than directly participating in the currency market, and the board may extend its easing cycle into the following year in an effort to shield the real economy.
- Official numbers in China remain good, but there are a few unpleasant reports of a credit crunch in the economic giant. What kind of “landing” does China face?
Although numbers coming out of China remain fairly strong, the region still faces a risk of a ‘hard landing’ as market participants see an increased argument for the People’s Bank of China to ease monetary policy. The extraordinary steps to prevent the economy from overheating may have to be unwound as the region faces a growing risk of a credit crunch, but the stickiness in price growth may limit the scope to loosen monetary policy as inflation holds above 6%. In turn, the PBoC may weigh alternative measures to shore up the banking sector, and the central bank may little choice but to direct inject more cash into the system in order to soften the ‘landing.’