Call it what you want. Currency wars, easy monetary policy or QE! Words which took precedence in early 2013 seem to be now becoming the major central theme, especially in the context of the spot forex markets. But before we get into the details, here is a quick recap of the major central bank’s stance on the issue.
- US Federal Reserve: 25% – Markets are speculating interest rate hikes in the second half of the year (View: Neutral to Hawkish)
- European Central Bank:05% – ECB is very likely to launch its QE sovereign and corporate bond purchases during Q1 of 2015 (Dovish to very Dovish)
- Bank of England: 5% – Currently maintains status quo, but expecting to hike rates in the second half of the year (after the general elections in May) (Neutral)
- Swiss National Bank: -0.25% – Introduced negative deposit rates and committed to fx interventions (Very Dovish)
- Bank of Japan: 1% – More QQE expected in 2015 (Very Dovish)
- Bank of Canada: 1% – Maintains status quo at least until Q1 of 2015 (Neutral)
- Reserve Bank of Australia: 5% – Gov. Wheeler rules out rate cuts until Q1 2015. Known for successfully talking down the Aussie and could intervene if necessary (Neutral to Dovish)
- Reserve Bank of New Zealand: 5% – Status quo at least until Q1 2015. Known for verbal interventions and selling of Kiwi (Dovish – Neutral)
- And we won’t even talk about the Scandies (Norway, Sweden, Poland and other periphery countries who will eventually struggle to keep a lower exchange rate to the Euro)
The clear divergence between the US monetary policy (at least for now) and most of the Central Banks is likely to be the driving force in positioning of the forex markets in the coming year 2015. With inflation being a drag on most economies (including the US, albeit to a lesser extent) and GDP growth stalling, Central bankers have taken it upon themselves to help their respective economies. For the unconvinced, a good example would be the Cable, which enjoyed a strong rally early in 2014 driven purely by speculation of being the first central bank in the developed economy to raise interest rates. Sooner than later with inflation playing spoilsport, traders dropped the Cable like a hot potato and went short on the British Pound.
In order to be able to be in sync with the markets, traders will have to keep their ears and eyes open to the Central bank monetary policies in the coming year as the currency wars are likely to gain more prominence. The biggest question amidst this frenzy of easy money printing is of course the US Federal Reserve. If we look closely, the markets are bullish on the Greenback purely on speculation of interest rate hikes (sounds like a very familiar story to that of the British Pound last year), however it is hard to recognize how the US can keep up with growth when it eventually becomes the currency that is the ‘last man standing’ a stronger currency against weaker peers would no doubt help imports but at the cost of running a large trade deficit and would also add pressure on exporters who would have to struggle with a stronger currency. The effects of this were already felt with companies such as Apple and Coca Cola every now and then voicing their concerns of the rising US Dollar in an environment of weak growth. So the question is how long can the US economy manage to stand tall in the storm of currency wars before it too will blink?
While it is impossible to predict the future, the forex markets have a tendency to repeat history and in this context, traders should approach the New Year with caution especially in aspects where speculation is rife for potential interest rate hikes.
