Continuing last week’s focus on 2014, we turn our thoughts to currencies in the new year. Year-ahead forecasting is always an interesting exercise and in the end there are always surprises. Nevertheless, it is still a worthy endeavor to look at how next year’s themes will sway our expectations for the path of FX rates around the world.
At the heart of our forecast is the expectation that global growth will dictate interest rates, which will in turn directly affect currency valuations. The base case for the U.S. is some rise in interest rates on the long end, as the Fed begins to pull back on the monetary throttle. Our colleagues at City National Rochdale are looking for U.S. 10-year Treasuries to yield in the 3.25%-3.75% range next year. With this in mind, here are our thoughts on currency trends:
We see the euro coming off modestly as the ECB maintains a very accommodative monetary stance. The recent strength in the euro in the last half of 2013 was not welcome by the European export sector, and the ECB wants to make sure they do not tighten too soon with so much at risk. The British pound is a bit harder to judge, as the Bank of England recently turned a bit more sanguine on the U.K. economy and there is the potential for tighter policy next year. On balance, however, we still see the U.S. gaining against sterling.
In Asia we expect the Japanese yen to continue getting beaten up by the U.S. dollar, as Prime Minster Abe seems committed to keeping rates soft and the JPY low. The Chinese renminbi will continue in recent ranges, as Xi Jungping maintains a solid focus on longer-term sustainability and reform, at the expense of some shortterm growth.
The commodity and emerging market currencies are heavily dependent on how the growth story plays out in the markets. A back-up in U.S. rates earlier this year trampled both currency zones, but Fed expectations seem to be priced in now to a large degree. This leaves the path for these currencies unsure; but on balance we still see some room for them to come down a bit more after their soaring trajectory of the last few years.
My View: This is how the 2014 landscape looks right now. No doubt it will change, but we will be here to help sort it all out.
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