Currencies Outlook for 2014

Little change seen for the US dollar and sterling, but another bumpy ride for emerging market currencies

Andy Brunner 12 December, 2013 | 2:44PM

What are the main trends expected in the forex markets?

It is quite possible that the main broad trends in 2014 could be fairly similar to this year i.e. firstly, further yen depreciation against the other main crosses; secondly, another bumpy ride in emerging market currencies; and thirdly, the US dollar, sterling and the euro crosses may show only modest change.

That the Fed and the Bank of Japan will be following divergent monetary policies will likely be the prime determinant of the USD/JPY exchange rate. The Fed is ready to begin tapering soon and will likely continue for much of 2014, while the Bank of Japan looks set to aggressively ease during the first half. In addition, trade balances show a declining Japanese surplus and a reducing US deficit at a time when Japanese corporates are recording strong outflows of FDI (foreign direct investment) and investors are being encouraged to buy overseas assets. Investors/speculators are already very short the yen, however, so the scale of devaluation is likely to be considerably less than in 2013. The average forecast from the investment houses monitored, is for USD/JPY at 107 by year end, but it could be higher.

As for the emerging market currencies, the next month or so could well see a further bout of volatility as the Fed embarks on its new policy of slowing bond purchases. Many countries have already experienced substantial currency depreciation during 2013, bond yields in the more vulnerable countries have already blown out and stock markets weakened. Additionally, carry traders have had plenty of time to unwind trades. Even so, the emerging market story has lost its sheen and fundamental macro conditions will take some time to improve across a broad range of countries. There are considerable differences amongst them and greater differentiation and selectivity suggests less contagion risk. Most commentators expect volatility earlier in the year but the overall backdrop of a strong recovery in developed market growth and generally better fundamentals should enable a more dangerous “shock” to be avoided.

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About Author

Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK

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