As 2013 bows out, we all tend to reflect, look back on what the previous year has brought, or maybe, taken away from us. When it comes to investments it’s not much of a different story.
In reality while many investors tend to underestimate the effectiveness of the currency component in their portfolios, you should know that the currency markets (or Forex as market jargon tends to put it) is by far the largest market.
The BIS Triennial Central Bank Survey issued last September showed that trading in foreign exchange markets averaged $5.3 trillion per day continuing to rise from the 2010, 2007 per-day averages, amounts that literally dwarf the volumes seen on equities and bonds in general.
But that’s enough with the preliminaries; let’s have a look at how the major currencies have been performing. As is typical at this time of the year, lower liquidity tends to mostly translate in range-bound price action that tends to give in to some erratic moves despite the lack of data or economic events that would rationalise them. Such was the EUR/USD’s behavior throughout the course of last week. The euro was fairly flat for most of the Christmas week but gained over 200 pips against the US dollar last Friday. The move was purely driven by technical levels with no fundamental news or event driving the price action. Seen against the USD, the euro looks on track to gaining over 600 pips (or just over 5 per cent) after last year’s close at 1.3181 as the currency pair is currently trading close to 1.38 levels.
Throughout the course of the last week the yen continued to weaken against the USD, the USD/JPY continued to make fresh five-year highs as it resumed 105 levels last Friday.
Moving on to the metals, gold currently trading at $1,999.84 continued to edge lower after Friday’s attempts to go higher were halted just below $1,220 levels.
Overall despite the challenge for the euro and the USD, brought about by ultra-loose monetary policy from both the Fed and the ECB, throughout most of 2013 (and before that since the start of the financial crisis) it looks like things are generally better for the two currencies.
In the eurozone, political stability and risks of contagion have relatively quietened down thanks to a stark commitment by the ECB and a number of reforms brought about by the European governments. While in the US the deadlocks surrounding budget decisions have subsided and an improved economic performance for the world’s largest economy has motivated the Fed’s first step towards normalisation – tapering. The Fed did scale back part of its record $85 billion a month of asset purchases.
For this past year the British pound has gained over 5 per cent on the Bloomberg Correlation-Weighted Currency Index (BCWI). The pound was stronger overall in 2013 against the USD, the GBP/USD made fresh highs for 2013 after hitting 1.6577 on December 27, levels that had last been seen in 2011. Against the euro, however, the pound looks set close 2013 on a weaker note. While the EUR/GBP continued to recover the losses suffered by the GBP in the first quarter of the year, the price of around 0.83 levels just before close was still far off from 2013 open at 0.8121.
In the UK, overall improving economic data and an expected improvement in mortgage approvals has fostered speculation that the British central bank could be raising interest rates sooner rather than later despite its forecasts. According to the BCWI the Japanese yen was the worst performing currency among the majors losing over 16 per cent throughout 2013.
The yen’s losses were the result of BoJ’s move towards unprecedented stimulus in sync with the Japanese PM’s economic strategy.
2013 has been a painful year for gold as it looks poised to shedding over 27 per cent of its value just hours ahead of the 2013’s close of trading. With the threat of inflation so far not a real issue and as geo-political tensions continue to ease and economic prospects improve, the attractiveness of gold seems to be diminishing. In addition, as the Fed makes its first step towards policy normalisation, gold being a non-interest bearing investment, starts losing its shine.
Upcoming FX Key events:
Today: EZ PMI manufacturing and US ISM manufacturing survey.
Tomorrow: Swiss PMI manufacturing, UK mortgage approvals and UK PMI construction.
Technical Key points:
EUR/USD is neutral.
EUR/GBP is bearish, target 0.8050, key reversal point 0.8450.
USD/JPY is bullish, target 108.00, key reversal point 97.50.
GBP/USD is bullish, target 1.6700, key reversal point 1.6200.
USD/CHF is neutral.
AUD/USD is bearish, target 0.8800, key reversal point 0.9150.
NZD/USD is neutral.
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RTFX Ltd is licensed to conduct investment services business by the MFSA. This information does not constitute advice, should not be relied on as such to enter into a transaction or for any investment decision and is provided for information purposes only.
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Rudolf Muscat is a senior trader at RTFX Ltd.