'Expect a slow Fed rate hike pace, EURUSD may experience bi-directional move' - Nenad Kerkez, Admiral Markets

NENAD KERKEZ
PROFILE
• Current Job: Analyst and Full Time Trader at Admiral Markets
• Career: Holds a MSc Degree in Economics at the John Naisbitt University (formerly known as Megatrend). Works as Senior lecturer and market analyst for Admiral Markets

View profile at FXStreet

Nenad Kerkez is an analyst and trader who has been in the market since 2008 and works closely with Admiral Markets as their Head Lecturer and Market Analyst. He is well known in the FX Community, ranking in the top 10 traders and analysts in the Forex Factory High Impact Members Ranking.

Nenad covers over 25 currencies on an intraday basis and has a Masters in economics. He also developed CAMMACD TM, a proprietary trading and analysis strategy. Further, he is the co-founder and head of Elite Currensea Trading, an educational website for currency traders.

Do you think the Federal Reserve will increase its interest rate on Wednesday? How big will be the hike?

I do expect a hike. But the hike should be slow, step by step. This week I expect FED to raise rates by 0.25 %. In economic terms a slow rate hike is much better than an aggressive hike. A slow and steady rate hike ( 0.25 % each 2nd 3rd meeting is much better than a sudden increase of 0.50). Historically USD has never made its cyclical high with the first hike. Step by step, a gradual hike should insure stronger USD through 2016 with occasional retracements as in every trend. Markets will surely be happier with a mid term step by step hike rather than a hike each meeting.

What kind of reaction do you expect from the Dollar? Do you foresee the EUR/USD going beyond current lows?

If we define current lows as 1.0462, no I don’t think so. The EURUSD should drop gradually. The initial reaction could be twofold, sell then buy and as I have already explained in the Friday’s EURUSD article, bi-directional move is possible. First bi-directional move has already happened – EURUSD bouncing to 1.1020 then drop below 1.1000. Initially, the reaction to FED’s decision should move the pair towards either 1.0850 or 1.1150 if the range stays unbroken before the FED’s meeting. Furthermore it is not just about the decision. It is not black and white only. As I already said, step by step hike is good for USD. What could be bad for USD is several hikes followed by a reversal or no hike. If FED hikes the rate this time but Yellen is dovish afterwards (the inflation fails to materialize, CPI numbers bad, other economical indicators show negative deviation from the forecast) then FED might do only 1 rate hike only which is not so good for the USD.

When do you think the Bank of England will start hiking rates?

I would have to say this will be synchronized after the timing of the rate hike by the US Fed Res Bank. With the UK unemployment at 5.3%, and its GDP Growth at 0.5%, there are improved signs that the UK economy is improving at the moment and nearing the BoE’s secondary goals. However, the BoE has a primary goal of achieving a CPI figure above 2%, and so far CPI is negative for this year. I see this as the major stumbling block before the BoE hikes rates. This is a major issue for most Central Banks, especially with a lowering Oil price, which is an input to the production cycle, thanks to failings of OPEC to reduce the Oil supply in the last week. If I was to predict any rate hikes in the UK, then it would be after Q2 of Calendar Year 2016.

In terms of Dollar related crosses, what is the most vulnerable currency against the Greenback facing an interest rate hike? Levels?

I would have to say currencies that are either linked to hard commodities and energy which seem to be getting weaker, or currencies that are underpinned by QE. So of the major crosses, that is Yen, EUR, AUD and CAD. Interestingly, the Yen is a reserve currency and appreciates during risk-off which is what we are seeing in Equities markets, so this will be the least effected of the group. So, I would say CAD and AUD the most due to commodities prices, and then EUR as its QE seems finite in the near future according to the ECB.

How far can the USDCAD go?

We need to define a timeframe for that. 1.3850 is strong resistance. It is also strongly correlated with OIL prices. As oil rises, the CAD can rise too and vice versa. Also we need to pay attention to other important factors which define the movement of the exchange rate. (commodity prices as Canada is rich in commodities, China’s growth, Employment rate, EM domestic currencies vs USDx etc). Currently I see that 1.3850 would be harder to break, and at this point we could see a retracement in 2016 towards 1.34-30.

What about oil? Do you expect any rebound? Or do you see the US Oil revisiting 2009 lows? What do you think about Goldman Sachs' call for a barrel of oil on $20?

After OPEC failed to reduce oil supply in their meeting last week, I am predicting that Oil will test new lows. For further information about the state of the Oil market, please read a previous summary by clicking here. Really, before we analyse this question further we must consider the cost of production of Oil. Most onshore oil production in the Middle East is the cheapest in the world at below USD25/bbl, this will definetely act as a floor for the Oil price I feel. Most offshore and onshore conventional oil production in the rest of the World is around USD40-USD50/bbl, so already they are starting to see losses emerging. Shale and Oilsands techniques of oil production are generally above USD65/bbl. With these factors known, you will start to see drilling for oil to subside eventually in the medium term, eventually the investment in this type of activity will subside and production should then meet demand. So in summary, the floor would be USD25/bbl, and this will be a temporary low, with prices likely to range above USD40/bbl in the medium term.