At the end of 2013, major central bankers have said their pieces, and as we get ready to venture into 2014, here are some important things we need to know:
Federal Reserve: The Feds decided start tapering by cutting down the monthly purchases to $75B (from $85B) while pledging to keep rates low for an even longer period of time (evidenced by “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent“). Fed Bernanke further talked about (paraphrasing) that this is just the first of tapering, and if economy were to improve further, the entire asset purchasing program could end by 2014, following the timeline of $10B per month reduction… Because of the combination that Fed is tapering while keeping the official rates low, adding to the fact that economy is improving, the USD is likely to remain well in demand heading into 2014.
European Central Bank: Draghi introduced forward guidance in 2013, stating that “rates to stay or lower for an extended period of time”, while delivering on that promise and cut rates to an unprecedented level of 0.25% on the Main Refi, while 0.0% on the Deposit Rate, and 1.00% on the Marginal Lending Rates. With economy showing signs of improvement, although still unbalanced, EUR is likely heading into 2014 neutral, but we cannot rule out surprising events that could inevitably affect its demand; events such as sovereign ratings cut (S&P cut Euro Zone on December 20, 2013 to AA+ from AAA-), and potential surprise from bailout members such as Greece.
Bank of England: Ever since Mark Carney took over as the Governor of BOE we’ve seen unanimous votes during the MPC meetings and a renewed sense of optimism. With economic data indicating a potentially sooner than later rate tightening policy, I believe GBP is positioned to gain as we head into 2014. Considering that the recent ILO Unemployment Rate is down to 7.4%, just mere 0.4% from the forward guidance of 7.0%, combined by the faster than expected drop in inflationary pressure, GBP has the potential of heading towards the 1.70 or higher if we were to get a series of positive fundamental indicators to support it; at the very least, GBP will be more resilient than EUR against USD.
Bank of Japan: BOJ Kuroda has claimed victory and stated that Japan is at the “half way” point in their fight against deflation. With BOJ likely to introduce more stimulus, while keeping their focus squarely on the exchange rates, I believe JPY will continue to weaken in 2014, although not at the same pace we saw during the early part of 2013, but nevertheless I wouldn’t rule out USDJPY reaching 115 or even 120 in 2014.
Bank of Canada: BOC shifted its bullish bias during mid year to a more neutral bias. With their inflationary pressure well-contained, BOC’s decision was not a surprise; what’s surprising to the market was probably the stubbornness of the central bank to keep its bullish bias for so long when in fact there was no supporting data to keep such bias. As we head into 2014, seeing that the Feds have started tapering, CAD could remain neutral to some degree, but because of its strong ties with the U.S., CAD should remain in demand against other majors (except USD).
Reserve Bank of Australia: RBA Stevens have used the I word (intervention) lately while constantly calling the AUD as “uncomfortably high”. It does not take a rocket scientist to figure out that RBA wants to see a weaker AUD currency, although they do not want to cut rates further and create an even bigger housing bubble, but there is always that possibility. Heading into 2014, my views on AUD is rather pessimistic. With China going through economic reforms, RBA wanting a weaker AUD, and the fact that U.S. is tapering, AUD could be heading lower, at least during the early part of 2014.
Reserve Bank of New Zealand: RBNZ is expected to hike rates soon, as a matter of fact, RBNZ Governor Wheeler started that “Rates must rise by 225 basis points (2.25%) over the next 2 1/4 year” while reiterating RBNZ’s stance on fighting inflation. I have absolutely no doubt that NZD is definitely one of the most likely majors to gain sharply in 2014.
Swiss National Bank: The SNB once again reiterated their resolve to keep the peg with the EUR (EURCHF) at around the 1.2000 level by committing “unlimited” amount of foreign reserve purchases. This effectively keeps the CHF weak in the long-term. I believe with the market shifting towards growth and stronger recovery, CHF could drop further in 2014. I would definitely look to SELL CHF, at least during the early part of the year.
In conclusion, I believe 2014 is going to the be year of the USD. We may see a even strong USD this year as recovery in the U.S. economy takes full effect. Fundamentals will have more impact on exchange rates while risk sentiments will have less. News trading is going to be more effective in 2014 as a result.
The Federal Reserve, ECB, BOE, BOJ, BOC, RBA, RBNZ, and SNB…
December 20, 2013 by Leave a Comment