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CURRENCY OUTLOOK 2018 - US$ Dollar 2018 - Consensus vs. Contrarianism? US$ Dollar ends 1st wave Decline in Q1’18 – begins Multi-Month Rally – Emerging Market Currencies Take a Hit

In This Edition:

It was exactly 1-year ago, in January 2017 when the annual forecast wrote: This year’s most anticipated event is the changing trend for the US$ dollar against its G4+ counterparts. Over the last 7.8-year cycle period, the US$ dollar index has traded higher from the pre-financial-crisis lows to current levels but contained within a typical Elliott Wave, THREE price-swing pattern…This 7.8-year cycle upswing is about to complete, into Q1’17 then stage a reversal-signature that resumes the long-term downtrend. The dollar’s decline over the next several years will be massive, fueling a resurgence in commodity values and other assets classes in this 2^nd phase of our ‘INFLATION-POP’ scenario.

It’s easy to forget just how prescient this forecast was because the US$ dollar has since declined so rapidly during the last year that it’s already embedded into our current reality – in other words, we’ve got used to it! But at the time, it was oh-so contrarian with consensus opinion heavily tilted towards a strengthening US$ dollar because the Federal Reserve was expected to continue tightening monetary policy and a resurgent U.S. economy triggered by President Trump’s ‘America First’ programme. But all that was blown away during 2017. The US$ dollar index benchmark has since declined by -14.8% per cent – but why? Part of the reason has been a resurgent Euro which is the world’s second most traded currency unit but that isn’t it – the real reason behind the US$ dollar’s decline is the change in its alternating 7.8-year cycle.

Back in 2008, the dollar index formed a low at 70.70 – fast-forward another 7.8-years to late-2016 early 2017, the cycle alternates to form its next major peak. This of course, means the next 7.8-year cycle is now in a downwards direction from the US$ dollar but what path is it likely to follow during this time period? No trend or even counter-trend trades in a straight-line. This annual 2018 report examines that path for the US$ dollar, but also how this relates to the Euro/US$, Stlg/US$, US$/Yen and many more currency pairs and crosses. And to place the 2018 forecasts into context, we’re examining long-term trends to see how they’ve interacted in the past, how they influence the future.

We also take a look at the net aggregated US$ dollar positioning against 8 currencies which offers a glimpse into sentiment extremes and what the immediate future holds for many of these trends. We expect to see a significant directional change of intermediate degree status into Q1 2018 which will have an effect on all currency pairs and crosses. Specific attention is also drawn to Commodity Currencies like the Aussie and Canadian dollar, together with Yen crosses against other majors. Our attention then turns to Emerging Market currencies, the Asian ADXY basket, but also some directional hints for the Korean Won, Singapore Dollar, Indian rupee, Taiwan Dollar, Thai Baht, Malaysian Ringgit, Indonesian Rupiah and the Philippine Peso. Our analysis will also include the Mexican Peso, US$/Rand, Brazilian Real, the Russian Rouble and China’s Renminbi – oh, I almost forget to mention Bitcoin! 

Interest Rates are a big subject for 2018 – whilst the Federal Reserve have begun to withdraw from monetary stimulus over the last year with rate hikes a normal feature and expectation for 2018, it’s quite a different story with two other major central banks. The European Central Bank is continuing to exert its stimulus programme with continued bond purchases with no signs of withdrawal even though it acknowledges the Eurozone economy is in a strong recovery. The Bank of Japan has just reiterated its commitment in maintaining its own economic stimulus agenda whilst its key inflation measures remain benign. This dislocation is an intriguing one but there is some uniformity in the way long-dated interest rates are behaving.

One aspect worthy of mention is that despite U.S. stock markets reaching new record highs and a strong economic reading across many industrial sectors, US10yr yields are relatively low by comparison. This annual 2018 report will offer some insights as to why this is happening whilst planning a definitive route for long-dated yields for this coming year. We’ll make comparisons with the benchmark European DE10yr yield and adding some cycle analysis before finalising with an outlook for the TIPS 10yr Inflation rate and Japanese 10yr yield forecast.