Investors have long adjusted to developed countries boosting their economies by de-valuing their currencies.
The European Central Bank, the Bank of Japan, and Riksbank of Sweden have created new money using asset-purchase programs, which have interest rates that are lower or close to zero. They are expected to easy the policy further this year. They aim to weaken the demand for their currency and boost up inflation and growth as their exports got even more competitive and the imports became more expensive. But, by the looks of it, it isn’t working out as planned.
The Japanese yen had hit its peak for 4 and half months already against the dollar this week. The Euro reached its 12-week high on a trade-weighted basis. Meanwhile, the Swedish crown is almost at its 10-month highs against the euro.
This year may be unstable for the foreign exchange market, especially if we base this analysis on the first weeks that went by. It is unlikely, however, that we could give investors clear, directional trades compared to the past few years.
A 25% rally of the dollar 9 months into March 2015, for instance, gave hefty returns for investors who bought it against a major currency. Despite the hike rates implemented by the US Federal Reserve, it is more likely to increase twice more in 2016.
Overall, 43 central banks have eased the policy in 2015. “Central banks’ mandates are almost becoming mutually exclusive. It’s a staggering situation when you’ve got a negative deposit rate and you can still see your currency appreciate,” said Neil Mellor, the BNY Mellon FX strategist in London.
Market confusion renders the waters unpredictable. Investors are now turning to safe havens, like the yen, as they fear sliding shares and weakened Chinese currency as well as geo-political threats between Iran and Saudi Arabia.
The Japanese yen has recorded its best performance since August 2013 last week and experts are speculating that yen will strengthen over the next months. Expectations for central banks to undertake monetary loosening have increased as well, establishing a bar that is much higher for surprising markets.
Twelve months after the asset-purchasing quantitative easing (QE) programme has been introduced in the late 2008, the dollar fell by 15% on a trade-weighted basis. But the Fed’s QE2 in 2010 strengthened.
“Central banks have reached a point of diminishing returns to their unconventional policies… (and) can no longer ‘shock and awe’ the markets,” says Stephen Jen, founder of the SLJ Marco Partners.