By Zachary Storella, CountingPips.com
Today, I am pleased to share a forex interview and commentary on this week’s major events and forex trends with currency analyst David Song from DailyFx.com. As an active trader, David relies on technical analysis for shorter-term forecasts while focusing on economic developments and central bank rhetoric to forecast long term currency price action.
David has been quoted by many major news sites including Reuters, Dow Jones Marketwatch, and CNN Money and his areas of expertise include central bank policy, economic indicators, and market events.
This week happens to be a very busy week of economic data releases that includes inflation reports, interest rate decisions and retail sales data. What do you feel will be the one or two most important events and themes to pay attention to for the week?
The biggest event risk for this week will be the FOMC interest rate decision followed by the Swiss National Bank on Thursday. The Federal Reserve is widely expected to 
maintain its current policy in December, but we may see the central bank talk down speculation for another large-scale asset purchase program as Fed officials expect economic activity to gradually gather pace in 2012.
As the fundamental outlook for the world’s largest economy improves, we should see the committee continue to carry out ‘Operation Twist,’ but Chairman Ben Bernanke may keep the door open to further expand the balance sheet in order to combat the protracted recovery in labor market.
We will also be keeping a close eye on the Swiss National Bank’s policy statement as we expect the central bank to keep the benchmark interest rate on hold, and the SNB may toughen its pledge to stem the marked appreciation in the Swiss franc as it drags on the real economy.
The Eurozone crisis continues to drag along with a latest snag being the United Kingdom vetoing a plan to change the EU treaty (to bring closer fiscal integration) at last week’s European summit. Save for a total EU solution to the crisis, do you see the Euro (EUR/USD, currently around 1.3350) heading further south the longer this crisis drags on?
In light of the recent developments coming out of the euro-area, with the region facing increased threats of a credit rating downgrade, the EUR/USD broke below 1.3200 as market participants turned increasingly pessimistic towards the economy.
As European policy makers struggle to restore investor confidence, we expect the single currency to face additional headwinds over the near-term, and the sovereign debt crisis is likely to drag on the exchange rate for some time as the heightening risk for contagion bears down on trader sentiment.
On a technical basis, what do you see as the important levels to watch on the EUR/USD going forward?
As the EUR/USD gives back the rebound from back in October (1.3145), the 38.2% Fibonacci retracement from the 2009 high to the 2010 low, which stands around 1.3100, will be key in the days ahead.
However, should we see a sharp selloff in the euro-dollar, there’s little in the way of seeing psychological support around 1.3000, and exchange rate may threaten the advance from January (1.2872) as the fundamental outlook for Europe turns increasingly bleak.
The USD/JPY has maintained a relatively tight trading range since Japan’s Ministry of Finance intervened in the forex market to weaken the yen back on October 30th. Do you feel the outlook for this currency pair will continue to be ultimately bearish (following the long term trend) or do you think there is case for a more bullish expectation taking place?
I would not advocate fighting the long-term trend in the USD/JPY despite the threats of a currency intervention, and the Japanese Yen may continue to appreciate against its U.S. counterparts as currency traders remain heavily long against the pair. The DailyFX Speculative Sentiment Index (which tracks retail positions with FXCM account holders) currently stands at 4.22, reflecting that 4.22 traders are long for every trader that short.
The USD/JPY SSI ratio has held in positive territory since the pair has traded back around 90.00, and it seems as though we will see more declines in the exchange rate as traders remain heavily short the Yen.
The Swiss National Bank convenes for its interest rate decision this week with expectations of the SNB holding the interest rate at its current level which is close to zero. Do you foresee any change in the status quo and/or do you see the SNB trying to up their successful policy of maintaining a range for the Swiss franc against the euro at the 1.20 exchange rate?
Indeed, the Swiss National Bank is widely expected to maintain its zero interest rate policy in December, and we may see the central bank step up its effort to dampen the appeal of the low-yielding currency. Indeed, there’s speculation that the SNB will push the floor up to 1.2500 or even 1.3000 as the heightening turmoil in the euro-area increases the appeal of the Swiss franc, but we expect the central bank to carry its current policy into the following year as the EU draws up a new fiscal accord to address the debt crisis.
The US dollar has gained ground against the other major currencies since the late summer or early fall. Looking out on the horizon over the medium to long-term, what do you see that could be a catalyst for change in sentiment of the dollar?
The U.S. dollar should continue to appreciate over the medium to long-term as the fundamental outlook for the world’s largest economy improves.
As Fed officials see the recovery gradually gathering pace in 2012, there’s limited scope for the central bank to conduct another large-scale asset purchase program, and we should see market participants turn increasingly bullish against the USD once the FOMC brings its easing cycle to an end.
Although some Fed policy makers have voiced their opposition against more quantitative easing, the committee needs to show a greater willingness to start normalizing monetary policy to see the recent U.S. dollar rally be maintained over the medium to long-term.
Thank you David for taking the time and sharing your views in this latest forex interview. To read David’s latest currency analysis and trading strategies you can visit DailyFx.com or follow him on TWITTER @DavidJSong.
