Looking ahead to next year there are a few key issues which already seem set to dominate the Forex landscape. Among these the most important are the potential US/China trade deal and Brexit. So, read on to take a look at the big consensus calls for 2019 and see if you agree. We have also included one outlier forecast that could offer good opportunity.
USD To Weaken
USD has been a clear beneficiary from the ongoing trade war between the US and China via the market view that the US gains more than it loses in the conflict. Furthermore, the investor uncertainty attached to the trade dispute has translated into increased safe-haven demand for USD.
With Trump’s tariffs working to reduce the US current account deficit alongside the Federal reserve steadily increasing interest rates over the year, demand for USD has been particularly high given that it can be used both for carrying trades and for safe-haven purposes, a rare overlap.
With the US and China now engaged in talks aimed at delivering a trade deal by March 2019, the prospect of US tariffs on Chinese goods being reduced or removed entirely has increased. Alongside this, the scaling back of tensions between the two economic superpowers in response to such a deal would weaken the safe-haven demand for USD leading to downward pressure.
Furthermore, the large fiscal boost derived from Trump’s tax reforms earlier in the year will lessen as we move into next year and given the outcome of the recent US federal elections (which saw a divided Congress) there is a low likelihood of any further fiscal stimulus to boost activity, which again will likely weigh on USD.
While the Fed has raised rates four times over the year, in line with projections, the latest increase in December saw the Fed lowering its forecast for 2019. The Fed now projects just two rate hikes over 2019, down from 3 previously and noted that it will monitor global economic and financial developments in making decisions around future rate hikes. This guidance has been taken by the market as a sign that the Fed will now slow the pace of its rate hikes with market pricing having reduced accordingly.
Two Way Risk Around Brexit
The ongoing rollercoaster ride of the Brexit negotiations has baffled even the most astute of political analysts, and so the most prudent outlook regarding the issue is to examine the risks in both scenarios.
If May can successfully pass her Brexit deal through UK parliament before January 21st with the UK then entering into a transition phase with the EU from March 29th, there will be a great deal of relief in the markets which should be reflected in a higher GBP and higher UK asset prices.
Accordingly, the BoE, which has stated its intentions to pursue higher rates in line with economic momentum, is then likely to sign a vote of confidence in the economy and the government’s Brexit deal by raising rates in May and signaling further increases to come. In this scenario, GBP is likely to be strongly bid.
Alternatively, if May is unable to get her deal through parliament, investor uncertainty (and the chances of a no deal Brexit) will skyrocket and we could very well see the pound plunging once again. The time frame means that if May doesn’t receive backing from parliament, she isn’t likely to have the time to make proper amendments, so the UK will likely leave the EU without a deal. In this scenario, GBP is likely to be heavily sold.
However, in one final spin, we could see the UK government opt to return the vote to the public in a second referendum. While May has ardently fought against this option, the pressure is mounting and if her vote is unsuccessful in parliament, she might choose to take this route rather than risk the economic damage of leaving the EU without a deal.
The RBA has had an incredibly frustrating year; persistently subdued wage growth along with high levels of household debt and slumping house prices, have all kept the RBA on hold. Rates have sat at record low levels of 1.5% for a record 28 consecutive weeks, and while the bank has stated that all policy members now agree that the next move in rates will be an increase, timing has yet to be mentioned. Current market pricing suggests one rate hike by late 2019.
However, there is a risk that this market pricing is a little too pessimistic. One of the big weights on AUD over 2018 was the ongoing trade war between the US and China, Australia’s largest trading partner.
As the trade war escalated and Chinese activity slipped, so too did AUD which is often used as a proxy for trading China. However, news of the truce agreed between China and the US at the G20 summit in November saw AUD initially spiking higher, later to be weighed down by weak GDP and a dovish RBA meeting.
However, if talks between the US and China progress positively and we see a deal put in place, this would be a huge boost for Chinese activity and consequently AUD. If AUD activity starts to pick up, specifically wages and inflation, this could see the RBA turning more hawkish earlier than expected, causing a big repricing in Aussie rates and lifting AUD.