Expect a rocky year for Forex markets
Despite its tumultuous nature, 2019 stood apart from other years by the fact that each asset category increased in value. These gains were made, in large part, thanks to a new infusion of stimulus packages that came from national banks. Among the primary currency pairs, the pound sterling was an unexpected leader, while the US dollar remained basically unaltered and the euro failed to meet overall expectations of investors. As we the market looks ahead to the rest of 2020, numerous risks maintain a steady hold over the global economy. While Europe and Japan are barely gaining momentum, Americans still have a presidential election in November to stir things up. The COVID-19 crisis has put almost all governments into a worrisome state. Brexit has been and remains uncertain. The global trade wars roll on. Indeed, even the yen, which was traditionally a currency of refuge for investors, has begun to sway with uncertainty. For now just the US dollar seems to be grounded in the market.
Any examination of Forex markets ought to start with the world's reserve currency, which finished the decade on a high note. While the US dollar may have become weaker against currencies such as the pound sterling and the Canadian dollar last year, it did gain some ground against numerous other peers, the most notable of which is the euro which lost 2.3 percent, as indicated by Refinitiv Datastream. This happened despite of the US Federal Reserve's choice to cut interest rates multiple times throughout the year. In that capacity, the US stayed as an interesting destination for capital streams, as it offered more significant returns when compared to its G10 peers.
With the first quarter of 2020 out of the way, the greenback has appeal has only been rising, contrary to the predictions of a considerable number of strategists, who had anticipated the US dollar would lose some of its allure as a haven currency, once the trade got back on its feet and the global economy gained steam. Be that as it may, is the perseverance of the dollar's strength really so unexpected, given the other options for traders? The truth of the matter is: it’s hard to recreate the dollar's exceptional status of being a high-yielding safe haven currency given the state of the market and the global economy at large.
While it may seem to be struggling from the outside, Donald Trump's America is still outflanking Europe and Japan by leagues, and seems to be on track to continue doing so, unless something drastically changes to dissolve the dollar's yield advantage, (for example, the Fed cutting rates with even more fervor or sustained recuperation somewhere else). For now it's hard to predict any genuine drawback to putting resources into the greenback.
Toughing it out
Europe, however, had an entirely miserable 2019 as development eased back and the uncertainty and various trade risks related with the Brexit initiative negatively affected the coalition's export-dependent manufacturers. The circumstances became so critical that the European Central Bank (ECB) had to reboot its quantitative easing (QE) program only nine months after it was stopped.
Despite the fact that there are some provisional signs that growth has started to bottom out, a significant bounce back remains alarmingly distant. Moreover, European financial policy is approaching its limits following years of large asset purchases, which means that any extra stimulus may not really the region’s economy in any meaningful way. What the region needs is a huge financial boost, yet with Germany demonstrating little adaptability in its monetary reasonability, all expectations are turned towards the recently named ECB President Christine Lagarde putting forth a case for an ease of the eurozone's strict financial regulations.
The greatest potential problem for the euro, however, is the White House switching its trade war focus over to Europe, since it has finalized the majority of its arrangements with its North American neighbors and China. Despite the fact that the US and the EU have had a several conversations on trade since 2018, formal negotiations are expected to only start this year. With France's digital tax mainly focusing on US tech goliaths and a long-running dispute in regards to Airbus subsidies sure to loom over the upcoming talks, there is plenty that could derail talks and ignite the Trump’s fury, which would likely bring about destructive auto duties.
Mainland Europe aside, the danger of a muddled Brexit strategy has not totally disappeared and is sure to make an its presence know sooner rather than later over the course of the year. The euro, as a result, is probably going to be stuck in a state of stagnation in 2020 and keep on playing its role as a funding currency. In the event that the state of economic stagnation endures in the absence of a significant stimulus package, the ECB could possible increase its QE efforts, which could result in new divisions inside the national bank.
No foreseeable end
The world watched the car wreck that was the 2019 Brexit impasse, which sparked political disorder in Westminster that has never been witnessed before in modern history. After finally leaving the EU on January 31st, talks regarding on the future of trade are already in progress, with both sides immediately drawing their red lines and innerving financial specialists all the while. UK Prime Minister Boris Johnson has stayed resolute in his assertion that the transition period will not be extended, which set a very troublesome (if not completely ridiculous) cutoff time to arrive at a comprehensive arrangement between both sides. The one thing that remains certain is that markets are not fond of the drawn out uncertainty, which is only being exacerbated by the COVID-19 pandemic. The pound could be confronting another “thrill ride” year, particularly once the Brexit stories begin flooding the news once again.
The PM’s hardline stance is also not doing any favors for the Bank of England, which faces one more year of Brexit-induced ineptitude. Predictions for a rate cut at dwindled after the UK economy bounced back at the start of the year, yet business conditions could just as easily weaken if a hard Brexit turns into the most probable result or if further cuts are required because of the COVID-19 spread.
A craving for danger
As trade stress peaked in 2019, investors rushed to the security of the Japanese yen. This year, however, doesn’t seem all that promising for the traditionally safe currency, with the yen feeling sudden and unexpected pressure in the midst of growing worries about the state and future of the nation’s economy.
Japan's GDP shrunk rapidly in Q4 2019, as a spike in sales tax and slump in exports that came out of the US-China trade war damaged growth for the entire region. Normally, the yen generally falls when investors are positive that the Bank of Japan (BoJ) will react to weakness with a change in policy. In any case, given the BoJ's depleted strategy reserve and the uncertainty in the face of COVID-19, the yen endured a selling session in February, which showed the world that it too is not immune to worldwide crises and gave reason to doubt its previously unshakeable safe haven currency status.
All things considered, demand for the yen could undoubtedly jump back if the dangers of the pandemic die down and new threats arise. For instance, the success of the 'stage one' US-China trade agreement hinges entirely upon the full compliance of both nations, and without said compliance, the arrangement falls apart.
Regardless of whether the trade détente holds up, another tax war could spring up in Europe, while the volatility of the Brexit deal and the very near-future US presidential political race bring further instability along with them. While the 2020 presidential race has yet to affect asset prices, financial specialists could disregard risky assets such as stocks and instead opt-in for safer alternatives, if a liberal Democratic nominee secures the party’s nomination.
China’s GDP growth has been consistently falling since 2011, and with US tariffs and the resulting uncertainty continuing to harm China's industrial sectors, 2019 was not any different. The economic lull would have certainly been more evident had Beijing not interceded with financial stimulus and regulatory easing.
Just as the trade war with the US began to die down and ease the economic pressure, China was dealt a further financial blow with the COVID-19 outbreak. Before the February’s end, the pandemic had forced the closing of an enormous part of the manufacturing sector and the travel restrictions sealed the deal. These disruptions could shave as much as 2.8 percent off the nation's first-quarter growth, as per ANZ's chief economist for Greater China, Raymond Yeung. This is certain to have severe consequences for global growth as well.
With hopes that the pandemic is contained in the very near future, the degree of fiscal and monetary stimulus that is issued by the Chinese government will be critical in deciding the speed of economic recuperation. The US may likewise give China some breathing room, permitting it to recover financially before coming back to trade negotiations. However, this too, remains uncertain given Trump’s penchant for using China to score political points