FX winners and losers of 2018

Summary:

• Argentine peso and Turkish lira have been the world’s worst currencies this year

• AUD and GBP have been battered by trade tensions and Brexit

• King dollar has come back, safe haven currencies (JPY, CHF) have been in demand as well

The strong US dollar has weighed on EM currencies so far this year. In the meantime, rising trade tensions between the US and China have acted to the detriment of Asian currencies including the Australian dollar. In such an environment safe haven currencies like JPY and CHF have performed relatively the best. Here we are showing our ranking of the best and the worst world’s currencies of 2018.

The losers

1. Argentine peso (ARS) and Turkish lira (TRY)

There is no doubt that these two currencies have been by far the worst performing in the world. The former has shed almost 51% while the latter has lost more than 28% on a year-to-date basis. Causes of these plunges were a bit different, however, one may find a common denominator as well - the US dollar strength. Note that both economies hold a notable foreign debt level. At the end of 2017 external debt in Turkey accounted for 53.4% of GDP, in Argentina 37% of domestic output. Furthermore, the structure of external debt in Turkey is weak as a lion's share of foreign debt is held by the private sector. Along with the appreciating US dollar both countries faced enormous downward pressures on their currencies. As a consequence, central banks were forced to deploy various measures to fend off speculators’ attacks. The main rate in Turkey was lifted from below 10% to 24% whereas the benchmark rate in Argentina jumped from below 30% to above 70% (it has slid to below 60% since then).

2. Australian dollar (AUD)

Almost 10% down against the US dollar, this is the AUD’s performance this year and a lot of this loss might be ascribed to the US-China trade war. When the trade dispute escalated in April the sell-off in the Aussie accelerated as well on rising concerns of a fading demand from China on commodities. Currently, the conflict has been suspended until March as a result of the temporary agreement reached by the two feuding countries in Buenos Aires. In addition to the trade thread one needs to mention subsequent rate hikes in the United States. Note that the US has currently the highest nominal rates among the G10 peers. This has also weighed on high-yielders such as AUD and NZD. Nonetheless, the Federal Reserve is beginning to think over the end of monetary tightening, and if it ultimately does so, it could ease other G10 currencies. Either way, the trade war seems to hold the top priority for the Aussie and its performance could highly depend on further developments regarding this topic.

3. British pound (GBP)

It’s all about Brexit when it comes to the GBP’s performance and this pattern is going to prevail at least in the weeks to come. The pound has lost over 6% against the buck on lingering Brexit uncertainty which has weighed on the real economy. Political turmoil is never favourable for the currency and the economy as well and the UK has been the best example of this. We have already passed a bumpy road including weeks of negotiations between the UK and the EU, a non-confidence vote for PM Theresa May, a series of disappointing macroeconomic data. However, we have yet to come to an end and a lot of uncertainty still lurks around the corner.

The winners

1. US dollar (USD)

The king has come back this year. The US currency has gained on the back of rising trade tensions, higher interest rates and still quite solid macroeconomic data. Nevertheless, some flaws can be found if we delve into the data flowing from the world’s largest economy. The weakest spot is the housing market. On top of that, consumer sentiment (UoM, Conference Board) and sentiment among managers (ISM) have reached unprecedented levels, and when the economy is set to lose momentum next year these indicators are expected to come off their highs as well. Finally, monetary policy appears to be the most eagerly watched topic going forward. The Fed lowered a number of estimated rate hikes for the next year to 2 from 3 and now it is forecasting no more rate rises in 2020. This has significantly increased the likelihood of rate cuts in the second half of 2020. Last but not least, the USD is substantially overvalued based on a REER approach, hence it might have peaked this year.

The US dollar index has hit a possible glass ceiling nearby 97.50. Since then, bulls have been unable to break above and an extended pullback could arise in the aftermath. Source: xStation5

2. Japanese yen (JPY)

The yen has been the sole major currency being able to resist the US dollar strength. On a year-to-date basis it has jumped 1.4%. The prime reason behind the yen strength has been the falling Japanese stock market and a rising demand for safe haven assets during heightened turmoil across markets. Of course, the yen remains highly undervalued on a REER basis but the BoJ is still far away from even thinking about monetary tightening. Instead, Haruhiko Kuroda signalled last week that the BoJ stands ready to ease monetary policy even more if necessary. Therefore, it seems that the yen could appreciated only on the back of the sliding dollar.

Technically the USDJPY could be at the beginning of a deeper downward move after the price broke through the trend line. Source: xStation5

3. Swiss franc (CHF)

Although the franc has lost all but 2% against the USD, it has been the lowest loss in the entire G10 basket. Relative better performance of CHF has stemmed from an unfavorable risk environment too. In terms of monetary policy we have the similar situation as in Japan - no rate hikes in sight. What’s more, the SNB slashed inflation projections in December and it is unlikely to act before the ECB pulls the trigger. The franc is expected to fall against the euro along with the rising EURUSD (our baseline scenario).