The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...
Where Are Currencies Headed in 2013?
01/03/2013 6:00 am EST
We look ahead to the forex markets, where they finished and what we can expect for the first half of next year, with Dean Popplewell of OANDA.
Gregg Early: I am here with Dean Popplewell, Chief Currency Strategist at OANDA. Dean, I thought that it might be a good time, as we get near the holiday break, to ask what are you looking at for 2013.
Dean Popplewell: Obviously, 2012 has been an extremely eventful year, dominated certainly by central banks' excessive control over their balance sheets, which has led to relative limitation of volatility and decreased opportunity in the Forex markets.
In the first quarter of next year, we are seeing very much the same thing. We do not expect too much divergence in policy in the core of the G10 currencies, with the possible exception obviously for Japan, which seems to be headlining the remainder of the 2012 calendar year, obviously with the new prime minister in power.
The global economy is expected to strengthen somewhat. Because of the capital injections that hopefully move from the financial to the real economy, I think most analysts and certainly I expect a modest uptick in economic growth next year, intersecting with the still accommodating monetary policy that’s dominating obviously most of the G10 currencies. This should provide support for other asset classes like global equities as well.
We still have to contend with a lot of range trading in the currency markets and low volatility, and this environment should persist certainly in the first half of next year.
Gregg Early: So you’re not seeing any of the wild swings that we were in last year. I’m guessing from what you’re saying that because the economies are slowly strengthening, you’re not going to see some of the gyrations that we saw in the euro—some of the fears—and while there’s a lot of liquidity out there, none of the currencies are being hurt by it, because it’s not really hit any economies yet.
Dean Popplewell: No, not precisely. We’re expecting all this excess capital and all this capital that’s been injected into the economies to move from the financial to the real economy. That should percolate down and obviously we should see some modest uptick.
Investors will seek out more risks to get higher returns. That will change the investment process for a lot of individuals. With low yields out there, returns have been very difficult, and it’s actually changed individual trading attitudes.
Certainly, appetites will change again next year. I mean monetary policy, with the little divergence amongst the G10, we will certainly have this low-volatility environment well into the first half of next year.
Gregg Early: And, with Japan, what do you see with the new leadership? There’s talk about how they’re trying to jawbone the Bank of Japan into doing something about the yen. Do you see that as any major factor moving forward, or is this all just more of the same for Japan?
Dean Popplewell: Well, I think we’ll see a lot of chopping and changing in that market. Obviously, the market is speculating on a weaker yen. That’s the dominant position that’s been taken out there at the moment.
The BoJ is expected to lean more toward aggressively significant policy change and more aggressive QE in 2013. Markets are still wondering if this will depress the yen. They’re betting that it will.
But you know, what we’ve seen in 2012 is the Bank of Japan has persistently been in an easing mode, and yet the yen has been relatively unchanged to a certain extent. We are certainly at the top end of the range for the year, but we’ve had tsunamis, we’ve have nuclear fallouts, we’ve had so many things, and we still can’t weaken the yen.
But the Bank of Japan may have to be rather innovative, and perhaps they will shift towards an inflation target. This would obviously help in easing the yen. But you know there is talk about potentially buying foreign bonds, and I would not believe too many foreign economies would be very happy if the Bank of Japan or the Ministry of Finance tried to go down that route.|pagebreak|
Gregg Early: And also, it’s kind of unique, the Japanese situation, because most of the bondholders are the Japanese citizenry, right?.
Dean Popplewell: Absolutely.
Gregg Early: That doesn’t really take place in most economies.
Dean Popplewell: No.
Gregg Early: Is that why there’s so much strength in the yen, just traditionally?
Dean Popplewell: No...well to a certain extent, yes, but what we’ve seen in the last year, the yen has basically appreciated on the back of reserve requirements—safe-haven status. Historically, individuals certainly have been looking toward the dollar, the Swiss franc, and the Japanese yen, but we already know that the Swiss National Bank is controlling the value of their currency.
The US dollar, with the Fed policies of late, certainly is weakening the dollar to a certain extent, and it leaves us with rather limited choice when it comes to safe-haven status. The Bank of Japan and the new government obviously will be battling against investors using the yen as a safe-haven vehicle or even a carry-currency vehicle as well.
Gregg Early: And the euro you think is stabilized here, and will be more range-bound, generally speaking, and less volatile?
Dean Popplewell: Well, we’re certainly at the higher end of the range when finishing out the year. Historically, the euro tends to finish on a relatively strong note. I think in the first quarter, the euro is certainly vulnerable to further weakness, mostly on the back of Spanish stress, as Spain comes back to Spanish issuance of further bonds, which will potentially widen their sovereign spreads.
That will put the euro in a vulnerable situation, and we could actually see it ease off a further couple of cents from these current highs. The Spanish spreads will only tighten obviously if Spain enters into some program with the ECB or the EU authorities; otherwise, you know, periphery spreads will pressurize the euro further in the first quarter.
Gregg Early: So I guess that’s the thing to look for: whenever there’s a bond issuance at this point in some of the southern European countries, you might see some more action in the euro, depending on where it is in its range. Where do you see the US dollar in all this? Still safety?
Dean Popplewell: I think for the US dollar and other countries like Brazil and China, we should be seeing some sort of economic recovery, which obviously should support the dollar to a certain extent, and the loonie and Mexico, south of the border.
Obviously the biggest concern for investors will be the trend in unemployment and whether that is curtailed to a certain extent. But with the amount of excess cash being put to work in the last year or so, we expect some modest uptick in economic growth amongst the G10 currencies, apart from the euro itself, because of the periphery problem.
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