Federal Reserve’s tapering will be the theme to spark volatility and volume growth in 2014
Most participants in the FX markets will mark 2013 as the year when the carry trade has returned. And the funding currency of choice is the same as before 2008 – the Japanese Yen. Ultra low interest rates coupled with record breaking balance sheet expansion by the Bank of Japan have resulted in a broad downtrend for the Japanese currency in 2013.
Retail volumes at Japanese brokerages soared to records in the first half of the year in tandem with the intensity of the fall, while currencies of choice to invest in ranged from the British Pound and the Euro to the US and New Zealand dollars. While in the beginning of last decade the mining and investment boom that caused high yields in Australia and New Zealand sparked the Carry Trade to flow to that part of the world, this time is a touch different.
The Chinese economy has been landing softly and its demand for commodities out of Australia has subsided. With the pullback from new mining investment and vigorous repeating of local central bankers the Aussie and the Kiwi have lost its luster as high yielders to the better liquidity provided by European and US currencies.
Retail investors prefer now to flock to safer currencies and the underlying momentum. Both the Euro and the US Dollar have benefited as a recovery process ensued in the Euro Zone and the US dollar is well on its way to become a commodity currency.
Even serious risk off situations during the year could not cushion its fall for long and most analysts expect this trend to persist throughout 2014. Contrary to most expectations The Euro, the Swiss Franc and the British Pound have been the strongest of the majors (and exotics save the CNY) this year. Whether or not retail investors got wrong-footed or not. The most volatile pairs were certainly in the Carry Trade against the Yen.
Next year might prove to be even more exciting as there is substantial speculation that the Bank of Japan might accelerate its easing efforts as their inflation target of 2% in 2 years following their April 2013 easing is still far from met. One thing is for sure – when the Federal Reserve’s tapering finally becomes real at some point, volatility to the majors will return in full force to prop up volumes yet again.