• Potential hazards aplenty as our neighbours start acting weird.
  • US Fed clearly has a rate rise problem and might need rehab.
  • And Europe is almost done laughing at the UK… but not quite yet.

The world of FX can be a brutal place to play – but there’s gold in them thar hills, if you can read the market and have the correct combination of testicles for this sort of investing: A gypsy’s crystal ball one the left, and on the right, a ball of steel for bravery.

(Just be careful when you sit down – the crystal ones are somewhat brittle).

So what does the future look like for the major currencies around the region (and in that other bit that’s ages away, but still pretty important)?

Well… it’s all going to depend on a lot of things in a lot of places because it’s all terribly, terribly complicated – but, in broad brush strokes, there are a few major newsy-type things from around the region worth clueing yourself in on, which will be important over the next few months.

And here they are:

 

Domo Arigato, Mr Long-Term Yieldo

FX markets are of course all abuzz after Japan decided to Crazy Ivan on its yield target policy, which frightened the pants off vast numbers of people, and shook local and international markets like they had a massive highly-radioactive and extremely ticked off lizard lumbering about and smashing things up.

The cause of the ruckus was the Bank of Japan’s decision to allow the yield on 10-year Japanese government bonds to shift up to 0.50 per cent instead of its long-preferred 0.25 per cent cap.

The tremors that we’re still feeling are because it was, for want of an apt term, a seismic shift in policy for Japan, which has been exercising its tactic of buying government bonds to cap interest rates on mid- to long-term debt to stimulate the economy by standing over borrowing costs and frowning a lot.

The tactic had made Japan something of an outlier among the world’s major economies – but the abrupt change by the BoJ came as a huge surprise… and now that the dust is starting to settle, the landscape looks like Japan is abandoning its stance and falling into line with the rest of the world.

And that means interest rates will rise in Japan – obviously part of the BoJ’s plan to put some zest into an otherwise flat yield curve to allow for investors to lock into long-term gains that will, under the new policy, provide something other than “thanks heaps, here’s your nut back” when they ripen.

But in the short term, the sudden shift sent the Yen flying, up 4.0% on the day Japan signalled to the world that its efforts to keep things in check domestically were set to take a different tack.

That’s since eased a little, but George Saravelos, strategist at Deutsche Bank, wraps up where Japan stands quite nicely:

“The BoJ policy shift (despite governor Kuroda’s claims to the contrary) should start to put the Japanese wall of money to work… [but], there is a lot to move.”

 

Meanwhile, in China… *cough cough*

The other major player in the region is China, and things there are … not great. But it’s social policy, rather than monetary policy, that is calling the tune beyond the Bamboo Curtain at the minute.

The main driver has been the not-particularly-quiet dumping of Chinese leader Xi Jinping’s “Zero Covid” strategy, which had imposed social restrictions so tight that the Chinese economy was essentially a mother goat trying to feed its kids, while in the ever-tightening grip of a massive Burmese python.

China quickly learned that when you lock everyone in their homes, things in general will grind to a halt – mostly because someone in Beijing failed to grasp an evident truth: Manufacturing gigs do not marry well to a Work From Home policy.

Here in the Decadent Free West, nowhere was that policy felt more harshly than a global supply shortage of critical commodities, like iPhones and laptops and other first world trinkets.

Now – we’re going to draw a line here that might prove to be a little unpopular – but bear with us… because the power structure in China is very clear, and has been since National Tank Day in Tiananmen in 1989.

That’s to say, Beijing makes the rules, and #$!@ you if you don’t like them.

However – mass protests across China appear to have precipitated the abandonment of not only Beijing’s domestic security policy of “Tank First, Questions Later”, but also the aforementioned Zero Covid policy.

The short term outlook is bleak. We don’t know how badly China has fared over the course of the pandemic, because China is quite famously only loosely concerned with reporting accurate numbers that might make it look bad.

But public health experts are almost unanimous in their prediction that the policy shift is going to cost the lives of millions of people in China – and might not be the panacea for China’s economic woes Beijing is hoping for.

 

Back in the USA Aaarrrrgh

In the US, inflation has also been at the heart of just about every discussion about monetary policy, as the Biden Administration frantically spent months slapping bandaids on every gaping head wound it could find.

Every month since as far back as it matters to FX traders, US Federal Reserve Chair Jerome Powell has been hard at work with his two main hobbies – trying to hobble inflation through hugely aggressive rate hikes, and tanking financial markets by being on the wrong side of candid whenever he talks about that publicly.

We’ve covered the ructions in the US to death in recent months – but the upshot of it currently is that Powell and the rest of the Board at the Fed have made it abundantly clear that rate hikes – possibly not quite as brutal as the 50bsp liver-shots we’ve seen so far – are going to be a feature of the US economy for a while to come.

 

Thanks for the lecture, windbag – what’s the FX future look like?

First, before we get to firstly, if you wanted to have exposure to currency fluctuations on the ASX then there are several ETFs that are attached to certain currencies.

BetaShares has ETFs for the USD (ASX:USD), Japanese Yen (ASX:HJPN), Euro (ASX:HEUR) and the British Pound (ASX:POU).

All of these are designed to follow the currency exactly in relation to the AUD. So if the relevant currency goes up 10 per cent against the A$ the Fund is designed to go up 10 per cent too and vice versa.

Voila.

Firstly, you’re welcome – and secondly, it’s looking pretty much how you’d expect it to look, with most experts broadly in line with the outlook that OFX published in the past couple of days.

And that looks like this:

 

The Aussie Dollar (Up)

“The Australian dollar’s direction through December will likely be shaped by offshore risk events, with the potential for the AUD to push back towards US$0.70,” OFX says, pointing to a renewed risk appetite that is adding buoyancy to the Aussie.

Which is great news for importers, who love it when the little Aussie Battler does well on the world stage – but a stronger AUD means that exporters of stuff feel the pinch… and Boy Howdy, do we love to export stuff – especially stuff that we dig out of the ground and ship overseas.

OFX reckons we’re at the mercy of how things progress in China and in the US (See? Told you all that guff was important…) and if things turn bad in those economies, the pressure could see the Aussie back below US$0.65 before too long.

 

The US Dollar (Steady)

OFX reckons that the outlook in the US is going to provide a “steady as she goes” progression for the USD, with the main risk factor being “any surprises from the Fed in relation to interest rate hikes”.

At this stage, though, it’s hard to imagine a scenario where anything Powell says woud be a surprise – the Fed’s been signposting and signalling harder than a sign language interpreter at an Eminem gig.

 

The Euro (Steady)

OFX says that the Euro could wander significantly, but is on track to remain broadly steady, with movements that “could range between 0.8475-0.770 against the pound, and 1.0000-1.0600 against the USD”.

The European Central Bank has an announcement coming up later in the month, and comments from ECB President Christine Lagarde indicate that Europe is about to get bonked by the le banque to the tune of another aggressive 75 basis point move.

 

The GBP Sterling

With the UK economy behaving like it’s lurking in a grotty portaloo at Glastonbury, thanks to political ructions and the revolving door at Number 10 Downing Street, the outlook for the Pound is surprisingly robust.

OFX says the Pound could range between 1.1800-1.2400 against the USD and between 1.14-1.18 against the Euro, after “markets took a shine to new Chancellor of the Exchequer, Jeremy Hunt’s Autumn statement where he unveiled £55 billion worth of tax rises and spending cuts in an effort to fill the UK’s fiscal black hole”.

The UK’s surge in inflation (there’s that word again) is (allegedly) past the worst of it, which could signal the GBP has time in the short term for a breather.

 

Japanese Yen (Up)

All eyes are already on what the Yen’s going to do against the dollar after the BoJ’s aforementioned Zig into a Zagging market, and the recent 4.0% single-day surge is a hugely potential sign of things to come – but still almost definitely an outlier result, with a far more mellow outlook ahead.

OFX says that the USD/JPY could trade between 130-142 in December, and that “90% of economists polled by Reuters believe that the Bank of Japan will eventually unwind their accommodative monetary policy.

“This means that despite some opportunity to regain losses against the weakening US dollar, any significant upturn in 2023 will likely be limited.”

 

New Zealand Dollar (Up)

For the NZD, it’s a case of seeing where the market’s going to blow it. The Kiwi recently pushed above US$0.62 and tested a break above US$0.6250, however “further gains towards US$0.63 will likely hinge on further improvement to the risk narrative”, OFX says.

“The NZD benefitted from an improvement in the global risk narrative in November, as softer US inflation data saw a correction in US rate expectations and decreased demand for the USD.

“With no major economic data or Reserve Bank of New Zealand meeting in December, the New Zealand dollar will continue to be driven by global events.”

 

Hong Kong Dollar (Up)

OFX has the USD/HKG possibly trading between 7.76-7.82 in December, and will most likely strengthen more as the US slows down its interest rate hikes over the coming months.

 

Singapore Dollar (Up)

And, OFX says that the USD/SGD could trade between 1.3400-1.4100 in December, adding that “should risk sentiment continue to improve and US yields continue getting lower, the SGD should find more support against the USD”.