Part 1. The major Currency Pairs
I pay your attention to the forecast for the major currencies and commodities dynamics in the first quarter of 2014. The first part of the forecast will be focused on the major currency pairs. The first month of the year was left behind. The most important event in January was the appointment of a new Federal Reserve chairman, who succeeded Ben Bernanke and continued his work on trimming quantitative easing program at each FOMC meeting. At the meeting on January 29, FOMC members voted for the next reduction of QE3 by $10 billion – to $ 65 billion. This decision was supported by Janet Yellen, who officially became the Fed’s chairman this week. The decision was not postponed due to panic in the emerging markets, negative dynamics of stock indices in the United States or weak U.S. employment report in December. Thus, the U.S. Central Bank management showed that only extraordinary events can prevent the U.S. from trimming its QE3 program. Trimming continues, so, the U.S. dollar can count on some support from the Central Bank’s monetary policy. Now let’s turn to the currency pairs.
In January, Latvia joined the Eurozone (E-17 has turned into E-18). As a result, the single European currency has shown a negative trend against the U.S. dollar due to fundamental (risk aversion by investors amid falling emerging markets) and technical factors (the upper limit of upcoming global bearish trend on the Euro in 2008-2013). However, this decline did not push the Euro far from its fair price level at about 1.36 dollars, according to Danske Bank analysts. At the moment, there are no objective reasons for the pair’s fall: the business activity in the Eurozone is gradually increasing, while the ECB leaders repeatedly remind that they see no deflation in the region’s economy and do not think that inflation in the E-18 is much lower than in other developed countries. Thus, the ECB is not expected to introduce any new stimulus measures in the first quarter. Meanwhile, due to trimming QE3 program in the U.S. and the ECB’s unwillingness to strengthen the single European currency, the growth of the EUR/USD will be restrained. I believe that in February-March, the Euro may drop to around 1.32. This drop will be possible due to technical reasons, not fundamental.
In January, the British pound failed to touch a 2.5 year maximum at 1.6667 against the U.S. dollar, yet ended the month below the closing level of December (about 100 pips). The fundamental background for the GBP was rather mixed in January. On the one hand, the economic growth accelerated to 2.8% y/y in the fourth quarter, while the unemployment rate approached the target level of 7%, which was mentioned as a threshold level by the Bank of England and is considered positive for the cable. On the other hand, just as I expected, the Central Bank’s leaders announced their unwillingness to raise the interest rates and warned that they will soon introduce new guidelines for the bank’s monetary policy. Obviously, these guidelines will show the markets that monetary tightening in the UK is not expected soon. This information can be released after the Bank of England’s meeting held on February 6. I expect a moderate decline in the GBP/USD in the first quarter to around 1.62 dollars per pound.
In January, the USD/JPY showed correction, which was supported by the demand for the safe-haven assets (due to concerns regarding the emerging markets) and by concerns regarding upcoming tax increase in Japan (in April). Negative dynamics of the Japanese stock market has graduated into the fall on the USD/JPY below 102 yen per dollar. I expect that this trend will develop and push the pair towards 100 yen per dollar in the first quarter of 2014.
In the second part of my forecast, I will focus on the prospects for the Russian ruble and the main commodities.