In 2019, there are several key issues which seem set to dominate the Forex market. The major one among these being Central Bank monetary policies. In this article, we will look at the long term trend of currencies in 2019 caused by central bank policies among others
The Federal Reserve will be the most significant influence on the value of the U.S. Dollar just like last year. The Federal Reserve increased interest rates four times in 2018. This drove the dollar to record highs against a lot of currencies during the year.
Last year, the Federal Reserve raised interest rates due to the booming economy. Although, they hinted in their latest monetary policy report that they may pause any further rate increases in this year unless the economic data backs more additional rate hikes.
If the Fed doesn’t hike interest rates, then the U.S. Dollar may trade lower or flat this year. The 2.67 percent 10-year Treasury bond yield will be the benchmark investors mainly use to know the strength or weakness in the Dollar.
The Reserve Bank of Australia held rates again at its December meeting. The RBA last changed its interest rates in August 2016, from 1.75 percent to 1.5 percent.
The RBA outlook for economic growth in 2019 was raised from 3 percent to about 3.5 percent over two years before slowing down in 2020. Consumption expenditure and cooling in the housing market will most likely keep interest rates on hold. If the RBA changes rates, they will most likely lower rates. AUD/USD will most likely weaken this year.
New Zealand Dollar
In its latest monetary policy statement, the Reserve Bank of New Zealand (RBNZ) held the official cash rate (OCR) at 1.75 percent. The RBNZ Governor also noted that the bank expects to maintain the OCR at the same rate into 2020.
The New Zealand GDP came out lower than anticipated. New Zealand will most likely feel the impact of a slowing global economy so most likely the RBNZ will not be able to sustain its outlook.
The current price action hints at investors anticipate a decrease in rates this year, but economists expect the rates to remain as is and some expect a rate increase in the fourth quarter in 2019. The New Zealand economy will not have enough strength to handle a rate hike especially if the U.S economy slows down. Most likely the RBNZ will lower the rates in 2019.
The NZD/USD will weaken in 2019 unless the RBNZ raises rates.
The BOJ is set to lower its inflation estimates and keep its ultra-loose fiscal policy, as stress on the economy rises in light of lagging global demand.
In its Summary, BOJ policymakers signaled that the global outlook was becoming worse and oil prices could fall which would delay their 2% inflation rate target. Moreover, economic strength in Japan is weakening given the forecast from the BOJ. Japan’s 10-year bond yield tumbled below zero for the first time since September 2017.
Safe-haven demand in the Japanese Yen will continue making the currency attractive. Still, if you remove this, the USD/JPY should be a solid pair. Unfortunately, this may not be the case in 2019.
The forex markets and economists are not expecting any interest rate hikes from the United States Federal Reserve this year, and a small possibility of an interest rate cut next year. If the Federal Reserve doesn’t increase rates, the Reserve Bank of New Zealand and Reserve Bank of Australia will most probably not raise rates. Also, if the Federal Reserve sees the U.S economy slowing down, then the New Zealand and Australian economies will slow down as well.
Global economic weakness could prompt the RBNZ and RBA to cut their rates. The BOJ will also maintain its monetary policy, which suggests that there will be no rate hikes this year.
The U.S. Dollar’s earnings will most probably be restrained if the Fed maintains the benchmark rates, but the gains could start to strengthen if Australia and New Zealand slash their benchmark rates. Some of the longs that hold positions in the U.S. Dollar Index futures have been decreasing their positions since the beginning of the year. Once the position-squaring becomes stable, we will most likely see mainly range-bound U.S. Dollar.