The U.S. dollar (USD) closed higher at the end of 2014 against almost every currency in both the G10 and emerging market sector than it did at the beginning of the year. This is a rare occurrence outside of recessions or financial crises where the U.S. Dollar Index gains against almost every currency over a twelve month period. The key factors that have lifted the USD remain in place, and those are the divergence in central bank policy between the U.S. Federal Reserve/European Central Bank (ECB)/Bank of Japan (BOJ) and the steady but improving performance of the U.S. economy.
While many of these factors have been in place now for quite a while, we still believe that the USD will outperform through most of 2015. A month ago, the conventional wisdom was that the Federal Reserve would begin to normalize interest rates around mid-year. That has since changed and has been pushed out to year end or early 2016. In addition to the Fed’s posture, there has been the overly dovish actions taken by numerous central banks taken at their regular meetings (ECB, Bank of Canada) or otherwise (Swiss National Bank, Denmark, India, and Singapore) fueling a sharp USD rise to start the year. The recent election in Greece and the potential for a left-leaning election result in Spain this fall will only add to eurozone uncertainties and continued pressure on the euro.
Potential wild cards that could derail or add to the USD’s performance are the following:
- Rising oil prices
- Chinese GDP performance
- Strong eurozone recovery
- Changing dynamics after the U.K. election
Interest rate dynamics appear to be the driving forces for this currency at the start of 2015, with the Fed eventually normalizing interest rates and the ECB beginning a new phase of monetary accommodation. Part of the reason we are not more bearish is due to the excessive expectations of a much lower euro in the marketplace and large speculative short positions.
Q1: 1.13 Q2: 1.12
Q3: 1.13 Q4: 1.14
The U.K. economy should continue to expand through 2015, with the expectation that the Bank of England will begin to normalize interest rates to a slightly higher level after mid-year. The U.K. election in May could be a key turning point for the government and the currency heading into the second half of 2015.
Q1: 1.50 Q2: 1.48
Q3: 1.49 Q4: 1.50
The fundamentals remain weak regarding the yen. A very dovish Bank of Japan, combined with trade and current account deficits and potential outflows from the Japanese pension fund to higher yielding countries, should keep the JPY on a downward trend.
Q1: 120.00 Q2: 123.00
Q3: 125.00 Q4: 124.00
The Bank of Canada surprised the market with a surprise cut in interest rates in January and laying out a rather dovish forecast regarding the effect of oil prices on the Canadian economy. Oil prices will continue to have a strong effect on the currency’s performance.
Q1: 1.25 Q2: 1.26
Q3: 1.25 Q4: 1.23
Similar to 2014, the yuan should remain largely range-bound, but be influenced by the overall performance of the U.S. dollar and Japanese yen. We anticipate some early weakness at the start of the year, with improvement starting in Q2. The performance of the Chinese economy (expectations near 7.0% GDP) and the response from China’s central bank will be key determinants.
Q1: 6.26 Q2: 6.28
Q3: 6.25 Q4: 6.22
The Australian recovery is closely tied to the performance of the Chinese economy which is still showing signs of deceleration. While the first half of 2015 still has many negatives (soft commodity prices), the second half should see some consolidation and upward correction.
Q1: 0.79 Q2: 0.78
Q3: 0.80 Q4: 0.81
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