Today, we bring you an interview with Kathy Lien, the internationally published author, Director of Currency Research of FX360.com and GFT, and co-author of BKForex Advisor, one of the few investment advisory letters focusing strictly on the FX market. She is one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. Below, Kathy shares her thoughts on fundamental analysis versus technical analysis, rate hikes in China, forex intervention, and other subjects.

Forex Blog: Can you briefly explain your approach to analyzing the forex markets. Do you prefer technical or fundamental analysis, or a combination of both?

I always use a combination of both fundamentals and technicals because I believe that the story drives the price.  Fundamentals usually set the tone for trading and set the trends that lasts for weeks, days and in some cases, even years.

Forex Blog: As head of currency research for GFT Forex, it looks like you cover most of the major currencies, as well as a handful of emerging/exotic currencies. What do you think about the macroeconomic gulf that is forming between the “G4″ economies (US, UK, Eurozone, Japan) and the emerging market economies (along the lines of debt, GDP growth, etc.)? Do you think that this division is reflected in forex markets?

I believe that the gap between the pace of growth in the G4 and the emerging markets will start to close as growth in the U.S. picks up and growth in China slows in reponse to rate hikes.

Forex Blog: You blogged recently about interest rate hikes in China and the possibility that the Chinese economy could slow down. What do you think are the implications for the forex markets?

Slower chinese growth is bearish for the commodity currencies because it means Chinese demand could slow.

Forex Blog: In a recent post entitled, “Dollar: 3 reasons Behind the Rally,” you suggested that the Fed is skeptical that its QE2 program will succeed in stimulating the economy. Can you elaborate on why you think this will benefit the Dollar?

Speculation about QE was the main driver behind the dollar’s weakness in September.  If the Fed is skeptical about the effectiveness of QE, they are more likely to pare back the program prematurely which would be dollar positive because it is one step closer to a rate hike.

Forex Blog: It has been said that the Fed is caught in a lose-lose situation, whereby its QE2 will fail and the US economy will drift back into recession or it will succeed in invigorating the economy and stoking inflation. Do you share this interpretation?

I don’t think I agree.  The Fed doesn’t have much of a choice right now and options for stimulating the economy are limited. Core Producer prices declined in October which shows that deflation is just as much of a risk as inflation.  The dollar will stabilize when the U.S. economy and U.S. data improves which is the Fed’s top priority.

Forex Blog: In a comparison of the Australian and Canadian Dollars, you asserted that while both countries’ economies are based around commodities, “At the end of the day however it is important to remember that Canada is not Australia.” With this in mind, can you  elaborate on why the Aussie has a better chance of trading above parity (with the US Dollar) than the Loonie?

Because Australia benefits from Chinese demand and global growth while Canada is mostly sensitive to U.S. growth.  The RBA is still considering more rate hikes while the BoC has made it clear that they have intentions of tightening monetary policy in the near term.

Forex Blog: A discussion of the major themes in forex markets wouldn’t be complete without mentioning the ongoing currency wars. First of all, do you think that the label “currency war” is fair? Do you think that most countries’ Central Banks will continue to intervene on behalf of their respective currencies, and do you think they will succeed in  preventing them from rising further?

I think if the dollar continues to fall, they will have no choice but to defend their currencies.

Forex Blog: What is your advice for (forex) investors that want to beat the market during these uncertain times?

Trade defensively and use a stop.