As 2018 draws to a close, economists, bankers, and major hedge fund managers dust off their respective crystal balls and begin to contemplate the future. These exercises will go into high gear over the prevailing weeks, as new predictions for major index funds, commodities, and currencies twelve months down the road will proliferate the Internet.
Banks will typically start with a broad risk assessment of potential event disruptors, business cycle considerations, and structural items. The general narrative for the year will then take shape, as consensus builds, but there will also always be a long list of caveats to prevent accountability from creeping into the process.
One key forecast entails what will the Almighty Dollar do in the coming year.
Will it appreciate again, as in 2018, or will gravity taker over and drive the greenback down to lower levels?
According to a recent Reuters poll of over 60 foreign exchange strategists, the opinion of this austere group is that the USD will reverse, knocking 5% off of its current index reading. The USD index has bounced about the 96.9 territory in the past few days, but the poll forecasts a 91.9 value by 2019 yearend. The Euro will benefit by rising again to 1.20, a position it has not visited since May of this year. It currently rests at a value of 1.14. The poll was conducted during the first week of December.
Kit Juckes, global head of FX strategy at Societe Generale, stated that:
FX trends this year have been all about the market making a series of upward revisions to U.S. growth forecasts for 2018-2020, in absolute terms and relative to its main trading partners. The story of 2019 is likely to be a reverse of those upward forecasts, in absolute terms first and relative ones somewhat later. If the initial move is for all growth forecasts to come down, dollar weakness may well be concentrated in the second half of 2019.
No one sees an immediate shift taking place. The long-Dollar bet has been the most crowded trade in 2018. Speculators have bet in favor of the greenback at record levels that harkens back to December 2016, when the Fed initiated its plan of normalization of both interest rates and its balance sheet. The reversal may be delayed, but short covering of Treasury positions will occur at some point. Economists are already positing that Real GDP in the United States will fall from 3.1 to 2.4% in 2019. A general economic slowdown, accompanied by lower earnings in the business sector, will lead to capital re-allocations about the globe. Expect volatility to spike, and the USD to fall.
Forecasting foreign exchange rates for the next week or month, let alone for a year, is an extremely difficult task. There are far too many moving parts that influence currency rates, and our global economy has never been so interconnected as it is now. As a result, every forecast will include a long list of caveats. Trade war tensions could seriously impact these projections. Geopolitical wildcards have a way of messing with any attempt at divining the future. And then there are also the “unknown unknowns”, any one of which could be troublesome. For these reasons alone, currency strategists will always revise their annual forecasts on a monthly basis, as many had to do this year.
2018 was a year of constantly raising USD expectations. Per Roberto Cobo Garcia, FX strategist at BBVA:
The fact that we had to raise our dollar projections does not change our scepticism about the long-term strength of the dollar, especially against G5 currencies. Nevertheless, these economies’ domestic contexts will be crucial for the performance of the greenback.
Will 2019 be a repeat, or the opposite? Time will tell!