By Zac Storella, CountingPips.com
Today, I am pleased to share our latest forex interview with currency analyst Ilya Spivak from DailyFx.com on the recent currency market major events and trends. Ilya specializes in fundamental analysis and economic and market themes for DailyFx while applying a top-down global macro approach to longer-term investing in the G10 currencies. Ilya has been cited regularly in leading news outlets including the Wall Street Journal, the Daily Telegraph, CNBC, CNN Money and Reuters.
Q: Last week we saw the US dollar gain against the major currencies (except the Japanese yen) as risk aversion reigned with the deepening crisis of the Eurozone. In terms of overall forex market impact and direction, what do you feel is the most important event or theme that traders should pay attention over the next week?
It seems the stock of near-term negativity that can conceivably drive markets downward has been exhausted in the near term, giving scope for a recovery in risky assets and a pullback in the US Dollar. Risk aversion is likely to return just ahead of Greece’s second attempt to elect a coherent government on June 17.
Q: What do you think is the likely outcome of this Euro crisis? Do you think there will inevitably be a country (like Greece) to leave or will the Eurozone be able to pull through this with all countries in tact?
The core issue in Europe is ultimately uncertainty because no one really has a viable benchmark for how the crisis can end or what a country’s exit from the currency bloc looks like. It is this very uncertainty rather than a concrete understanding of the outcome scenarios that has weighed so heavily on the Euro and that is likely to remain a major overhang in the near to medium term. With that in mind, a likely Eurozone recession this year and its implications for dovish ECB monetary policy are reasons enough to maintain a bearish bias on the Euro, debt crisis developments notwithstanding.
Q: Outside of the Eurozone woes, what other themes are you watching for and feel will have an impact on the overall forex market and dictating trend direction?
We know that most economic forecasts point to a slowdown in overall global economic growth in 2012 and that headwinds are expected to come from a recession in Europe and a slowdown in Asia. Meanwhile, the US recovery is actually expected to accelerate, so a major theme at work through the year-end is the extent to which North America can mitigate weakness elsewhere. This opens up opportunities in inter-regional growth plays like AUDCAD (trading Asian vs. North American economic performance trends).
Q: Can you share your analysis on the EUR/USD pair? The EUR/USD has recently been falling to its lowest levels of the year due to the crisis. Do you feel we are likely headed to lower levels still or has this bearish trend gone a little too far?
Broadly speaking, EURUSD has been trending lower since topping out above 1.60 in 2008. The boundaries of this structural decline remain very much intact at present and overall weakness seems likely to continue. Zooming in to the recent past, the period between late October 2011 and mid-January 2012 can be seen a move in favor of the overall trend. This was followed by corrective recovery through late February, followed by two months of consolidation and ultimately bearish trend resumption in May. The intensity of recent selling has made for stretched positioning at this point and I expect a bounce from the 1.25 figure to the 1.28-1.29 area before downward momentum returns. A breach of the 1.25 figure is likely to open the for a push lower to 1.2250.
Q: The USD/JPY has trended back down to trading under the 80 level after surging in March to its highest level in almost a year. Can you comment on this currency pair and where you see it going and has this Yen strength been mostly related to risk aversion?
This pair has a long-standing relationship with US Treasury yields, so in a way recent weakness is related to risk aversion. When investors pile into Treasury bonds for safety, yields decline and USDJPY follows. Looking ahead, lingering instability in the Eurozone and slowing growth on a global scale is likely to keep prices relatively capped near-term. If the US recovery gains momentum as most economists’ expectations appear to show however, dissipating QE3 expectations are likely to give yields scope advance and push USDJPY higher in a longer-term, structural way.
Q: As we head towards summer and are approaching the half-year mark of 2012, do you have any predictions for winners or losers over the coming second half of the year in terms of specific currencies and major trends?
The dominant themes that we started with in 2012 remain largely in effect. North American growth looks better than Europe and Asia, and so being long the Canadian Dollar against currencies sensitive to growth the other regional hubs like AUD, SEK and NOK is likely to remain compelling. The US Dollar is likely to remain attractive against European currencies (EUR, CHF, GBP) where the trajectory of monetary policies is likely to look increasingly dovish as growth slows.