What’s in the Paper?


Which horse does the smart money back in 2013? There are interesting plays ahead as the global economy continues to slowly recover.

A New Year signals a new playing field in the FX markets, with many predicting a weaker JPY. Two years of trade deficit and a continued strong performance from the yen no longer stacks up. The Bank of Japan has been busy printing money and a current account surplus is turning into a deficit. The Wall Street Journal recently reported that the seasonally adjusted current account was in deficit in September for the first time in more than thirty years. The sudden surprise drop has some economists warning that Japan’s ability to generate wealth is eroding faster than expected and its fiscal situation could be more fragile than many thought. Data for December shows that Japan still retains a current account surplus although this fell 30% year on year. There seems to be heated debate between political leaders and the Bank of Japan in terms of how to address this problem of deflation with the preferred solution being to print more money and buy foreign currency bonds in order to create a selling pressure in the FX markets and thus weaken the yen. The market will catch on quickly and jump on a sure thing making the Yen look like the best table in the casino.

Closer to home, the GBP has also remained surprisingly strong, although it’s anticipated that further quantitative easing by the UK government will lead to a weakening of sterling later in the year. The outlook for the UK economy is weak with predicted slow growth but there are some concerns here particularly in the trade balance and current account deficit, which reached record levels in Q2 2012 of over 5% of GDP. Underneath all of this, it’s apparent that there are structural problems with the economy that don’t stack up and the Bank of England may need to look at weakening sterling in order to address trade deficits.

In northern Europe we see an interesting outlook in Scandinavia with the SEK, NOK and DKK all looking more predictable. The Swedish krona has been relatively flat recently and the domestic outlook is weak with slow or marginal growth anticipated in Q1 and Q2. Inflation is likely to be static at 0% or below and we’re expecting pressure on Riksbank to return to SEB official repo rate forecast at 0.75% in Q1 in order to stimulate growth. Norway has a stronger fiscal position and is favored for the medium term and the NOK has been seen as something of a port in a storm with many traders. In Denmark the DKK is likely to stay on the right side of parity as a healthy current account surplus, steady interest rates and the government continuing to make Danish bonds attractive all combine to create a steady ship for DKK.

The Euro is still facing a challenging time and political uncertainties in Europe and a period of necessary stabilization could well result in further ECB rate cuts. There has been a resistance to borrowing from private households and business despite interest rate cuts and the ECB is likely to hold interest rates in the hope that more readily available credit will cause stimulation. With general elections in Germany and Italy during this year there is some skepticism as to whether the IMF prediction of a EU current account surplus of 1.3% can stand up in 2013.

Across the Atlantic, the USD is expected to pick up following the expected fiscal cliff agreements between the President and Congress. With the economy walking a fine line between stability and recession it seems highly unlikely that the two sides will not cooperate fully as the consequences are inconceivable. Any political agreement is expected to come with a solid long-term program based on spending cuts and higher taxes to reduce the public deficit, which in term could have a negative effect on the position of the USD in the medium term. Many feel that the weak outlook in the Euro-zone will help support the USD but anticipate a continued low scoring against other currencies.

Asia is generally favoured for those looking towards a long position, particularly with MYR and CNY that are set for slow appreciation offset with a hedged short KWR position. Malaysian elections are expected in Q2 and no one is expecting any change in leadership since Prime Minister Najib’s budget in September 2012 was warmly received by many for its tax cuts and benefits for lower income households. A continuation of term would allow Najib to plough on with his liberalization reforms in the equity markets. CNY is likely to move to a wider daily trading band of +/- 1.5% from the existing +/- 1% and USDCNY could end the year lower than previously thought. Korea is the wild card here and is seen as an under-valued currency and has been less volatile than other Asian currencies. The cyclical recovery in Europe, US and elsewhere will help Korea as an exporter and a gradual dove downwards in USDKWR is expected during Q3 and Q4.

Michael Greenberg of Forex Magnates recently shared some useful overview predictions, two of which were certainly worth further consideration:

We’ll see a faster increase in mobile trading and percentage volumes will increase greatly. The advent of technology and how it affects FX trades will doubtless make markets more nimble.

The larger FX brokers will continue to grow in the US whilst we see a reduction in numbers of smaller brokers and the reverse is likely to be the case in Europe. Once again this could affect the way FX traders operate in general and is worth watching

It’s likely to be a less volatile year in the FX markets with a settling period anticipated for EUR and USD. The hotspots are likely to appear in Asia and around emerging markets, but with so many potential pitfalls for Europe and US it’s likely to be a game of devaluation as trade deficits are tackled.

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