• 2018 has been a challenging year currency traders and investors. ANZ Bank says 2019 “looks like it has the potential to make 2018 look like it was straight forward”.
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• The bank’s FX strategy team expects an “inherently volatile and thematically unstable environment”.
• ANZ doesn’t expect emerging market currencies will be hit as hard as they were this year, although it doesn’t think that will help the Aussie dollar. It does, however, like the prospects for the Japanese yen.

2018 has been a challenging year for investors, including those who like to dabble in currency markets.

However, if you’re looking for an easier time in 2019, be prepared for disappointment, says ANZ Bank’s FX Strategy team, led by Daniel Been.

“2018 has been a tumultuous year,” Been says.

“The market has struggled to hold to any one theme. We have traded a weak USD via the twin deficit thesis, a strong USD on fears of the Fed ratcheting up rates.

“We have had a blow-off top in emerging market assets as coordinated global growth and decent liquidity provided a strong tailwind. And despite this we have ended the year with large EM under-performance and one of the largest portfolio outflows in the era of quantitative easing.

“2019 looks like it has the potential to make 2018 look like it was straight forward.”

Ominous, right?

Been says there are several factors underpinning this view, all of which carry the potential to “make for an inherently volatile and thematically unstable environment”.

“The global growth trend will slow, policy inertia and tighter credit will intensify the weakness in liquidity, and geopolitics will remain at the forefront,” he says.

“Altogether, we have a recipe for significant uncertainty.”

Given that backdrop, Been expects that fundamentals will play a secondary role in determining currency movements next year.

“We think that it will be a year where overshoots from fair value, rather than changes in individual currency fundamentals, will drive performance,” he says.

“We also think these overshoots will mark the peak in the broader USD trend.”

Been says that as the US economy slows, “it will be harder to trade currencies on growth differentials, as most economies are moving in the same direction”.

“This may see the end of US exceptionalism and significant US asset out-performance.”

So the days of US dollar-denominated assets outperforming those in other regions are numbered, but will that mean we’ll see strength return to those currencies that have been beaten up this year?

Been doesn’t think it will, although he says the shellacking emerging market currencies copped this year is unlikely to be repeated.

“We’ve become more neutral on the fate of USD/Asia,” he says. “Outflows have already been significant, and valuation is nearing historically attractive levels.”

But he doesn’t believe that will support the Australian and New Zealand dollars, predicting further weakness lies ahead.

“We do not think that the more nuanced environment for emerging Asia will necessarily lead to a similar result for developed market risk-sensitive currencies,” Been says.

“In particular, the AUD and NZD are, on our measures, both still somewhat expensive.”

And given the expectation that 2019 will be an “inherently volatile and thematically unstable environment”, Been says the Japanese yen — a well-known safe haven asset — is likely to be supported.

“The Japanese yen’s probabilities are tilted to it behaving like a safe-haven currency,” he says.

“The peak in US growth and yields, together with the tightening in liquidity and compelling valuation, all suggest the JPY should have a big year where the range is broken and strength prevails.”

Here’s ANZ’s FX forecasts until the middle of 2020.

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