Download John J. Hardy - A wild ride awaits currencies in 2015

 THE SPECIALIST IN TRADING AND INVESTMENT
Hellerup, 16 December, 2014 A wild ride awaits currencies in 2015 By John J. Hardy The foreign exchange market is closing 2014 with a bang, and 2015 could very well offer currency developments of historical magnitude as we continue to awaken from the mostly rather sleepy foreign exchange market that characterized the post-­‐global financial crisis period of 2009 to mid-­‐2014. During that period, it was about the passing of the “central bank easing baton” from the Fed in 2009-­‐2011 (weak USD) to the ECB in 2011-­‐2012 (weak Euro) to the anticipation and reality of the first phase of Abenomics, which was really the Bank of Japan’s Kurodanomics, from late 2012 to early 2014 (weak Japanese yen). From mid-­‐year this year, the action began heating up again, as the USD launched its most significant rally in years , driven by the Fed completing its “tapering” of QE3 asset purchases and as the market anticipates the Fed’s first rate hike since 2006 around mid-­‐2015 amid a solid economic recovery. Elsewhere, currency market volatility kicked into a higher gear after the Bank of Japan in late October surprised by doubling down on what was already the world’s most radical monetary policy experiment. And at the ECB, the dovish majority is desperately fighting to get the monetary printing presses restarted after watching the ECB’s balance sheet shrink by a third over the last two years. Going into 2015, therefore, the world’s major central banks and economies are entirely out of synch and the oil price collapse has added a dramatic new geopolitical and economic twist to global markets. The baseline scenario I have outlined for the major currencies in the New Year is a quite benign one in which the Fed hikes a bit more than currently expected and we continue to see US dollar strength on US outperformance. Meanwhile, I am assuming a relatively orderly decline in the Japanese yen. As for the ECB, I presume the central bank will finally overcome German objections and political obstacles and successfully restart the printing presses at either the January or March meeting with full-­‐blown QE. But my chief concern when reviewing my forecasts is that are too neat and easy. There are simply too many uncertainties and potential directions the course of the economy, policy and the markets can take next year – more so than in any other year I can recall. Specifically, there are four key “what-­‐ifs” that should be keeping currency investors up at night as we all try to divine what 2015 will bring us. 1. What if the Fed tightening triggers a train-­‐wreck in asset markets? There are already signs that the junk bond market in the US is under severe strain here late in 2014. Liquidity is terrible in these C O P E N H A G E N . L O N D O N . S I N G A P O R E . D U B A I . P A R I S . T O K Y O . A N D O T H E R F I N A N C I A L C E N T R E S A R O U N D T H E W O R L D W W W . S A X O B A N K . C O M SAXO BANK A/S Philip Heymans Allé 15 2900 Hellerup Denmark
Telephone: +45 3977 4000 Telefax: +45 3977 4200 Reuters Dealing Code: SAXO Cvr. nr. 15 73 12 49 [email protected]
THE SPECIALIST IN TRADING AND INVESTMENT
bonds due to new legislation ironically aimed at reducing bank’s balance sheet risks – which is now fully market risk. Junk bonds related to the US shale oil are the most clearly in the danger zone and investor flow out of bonds could see mayhem and see the Fed ceasing all thoughts of hiking rates. Outcome: USD would weaken sharply. 2. What if Draghi bolts? It is clear that the consensus is not there in the ECB to bring the dramatic new easing that Draghi wants to lift the Euro Zone out of the deflation danger zone. What if Draghi can’t get the full programmed he wants early in 2015 and resigns in protest? Outcome: First the Euro will fly higher and then we’ll be talking about another EU existential crisis. 3. What if China devalues? For a time in November, Japan’s real exchange rate, (inflation adjusted) was at a record low at the same time that China’s was at a record high. Deflation risks are rising in China as the regime there deals with deflationary risks of the unwinding of its credit bubble of historic proportions. Could China tear a page from the Bank of Japan’s playbook and devalue the yuan, exporting a wave of deflation to the rest of the world? Outcome: This would launch a whole new and dangerous chapter of the currency wars. 4. What if Japan loses control of the yen weakening? There is the distinct risk that the Bank of Japan’s new easing programme is simply too much and we see a domestic collapse in confidence in the yen in 2015 on an avalanche outflows. Outcome: This would force the BoJ to change direction violently to defend the value of the currency. Keep in mind that all of modern history’s worst episodes of volatility have had the Japanese yen at their epicentre. I expect we could get a very wild ride for currencies indeed in 2015, with volatility sparked by one or more of my what-­‐if scenarios above. About John J. Hardy Originally from Texas, John Hardy graduated from the University of Texas at Austin with high honors. He has been with Saxo Bank since 2002 in various roles in FX Strategy and Asset Management. Today, John works as Head of FX Strategy. John has developed a broad following from his popular and often quoted daily FX Update column, received by Saxo Bank clients, the press and sales traders. He is a regular guest and commentator on television networks, including CNBC, CNBC Arabia and Bloomberg. Alongside his column and media appearances, John writes regular ad-­‐hoc commentary focusing on the major currencies, central bank policies, macro-­‐economic trends and other developments. John Hardy is available to comment on FX and the major asset classes from a macro perspective. Contacts C O P E N H A G E N . L O N D O N . S I N G A P O R E . D U B A I . P A R I S . T O K Y O . A N D O T H E R F I N A N C I A L C E N T R E S A R O U N D T H E W O R L D W W W . S A X O B A N K . C O M SAXO BANK A/S Philip Heymans Allé 15 2900 Hellerup Denmark
Telephone: +45 3977 4000 Telefax: +45 3977 4200 Reuters Dealing Code: SAXO Cvr. nr. 15 73 12 49 [email protected]
THE SPECIALIST IN TRADING AND INVESTMENT
Mail: [email protected] Business Phone: +45 3977 6556 Cell Phone: +45 2115 3802 C O P E N H A G E N . L O N D O N . S I N G A P O R E . D U B A I . P A R I S . T O K Y O . A N D O T H E R F I N A N C I A L C E N T R E S A R O U N D T H E W O R L D W W W . S A X O B A N K . C O M SAXO BANK A/S Philip Heymans Allé 15 2900 Hellerup Denmark
Telephone: +45 3977 4000 Telefax: +45 3977 4200 Reuters Dealing Code: SAXO Cvr. nr. 15 73 12 49 [email protected]