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Currency Outlook for 2019

Source:Shutterstock

The standout feature of the currency markets in 2018 was the strong performance of the U.S. dollar. America’s currency gained against that of practically every other nation.

Why did that happen? While there were many reasons for the appreciation of the U.S. dollar last year, the most important was that the country’s central bank adopted a hawkish stance. The U.S. Federal Reserve raised rates four times in 2018. In addition to this, America’ economy grew strongly. Employment was at record levels with the number of job openings exceeding that of job seekers.

Source – Visual Capitalist

Will the dollar’s performance be repeated in 2019? Phillip Future’s investment analyst Samuel Siew spoke at length about the outlook on currencies in 2019, during a seminar on Feb 8. Here’s what was discussed.
 

U.S. Dollar

A poll conducted by the international news organization, Reuters, in January 2019, found that a vast majority of analysts expect the U.S. dollar to give up the gains that it had made in 2018.

The reversal is expected to take place because:

⇨ The Fed says that it will exercise “patience” in 2019. This means that interest rate hikes will be delayed.

⇨ America’s GDP numbers are expected to be less favourable this year.

⇨ A recession may be around the corner.

The position is accurately summed up by Erik Nelson, currency strategist at Wells Fargo, who says, “Basically the dollar has run out of things to make it go higher.”
 

British Pound

When the Brexit referendum’s results were announced on June 23, 2016, the British Pound plunged by over 10% to U.S.$1.33. It hasn’t recovered since then.

Today, the pound trades at U.S.$1.28. Where will its value be in 2019? That’s anybody’s guess.

Forecaster’s unable to form a consensus on the pound (December 19, 2018)

Source – Financial Times

Brexit, which marks the exit of the U.K. from the European Union, is scheduled for March 29, 2019. There’s no deal yet. How will the country’s business and financial institutions function from that date onwards? How will the borders operate? Nobody knows. This uncertainty makes the pound’s future value hard to predict.

HSBC, a respected bank, has recently forecast the value of the pound under three different scenarios – No Deal (the U.K. leaves the EU without any arrangement to replace the existing rules), Deal, (there’s an orderly exit with a new framework in place when the U.K. formally exits the EU), and No Brexit (the status quo continues.) It has given each of the scenarios a 33% chance. Here’s their forecast for the value of the pound.

Scenario Forecast for the pound’s value
No deal U.S.$1.10
Deal U.S.$1.45
No Brexit U.S.$1.55

(This forecast replaces their earlier estimate of U.S.$1.30, which was made in December 2018)

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Euro

A number of factors will affect the Euro’s value in 2019:

⇨ The U.S. – European Union trade war could escalate. Although matters are quiet now as President Trump concentrates on China, the possibility of an increase in trade tension cannot be ruled out.

⇨ Economic growth in Germany, the country with the largest GDP in the EU, is petering out. In 2018, the German economy grew by only 1.5%. In 2017, the figure was significantly higher at 2.2%.

⇨ France, the third largest economy (the U.K. is the second) in the EU, has problems of its own. The Bank of France estimates that the gilets jaunes (yellow vests) movement has already had a negative impact of EUR4.4 billion on the economy. Other estimates put the figure at EUR8-10 billion.

In a forecast made at the end of last year, JPMorgan, an investment bank, predicted that the Euro would hit a low of U.S.$1.11 in the first quarter of 2019 before rising to U.S.$1.18 by the end of the year.
 

Singapore Dollar

In the current year, the Singapore dollar has strengthened against the U.S. dollar. At the beginning of 2019, the USDSGD rate was 1.3629. By the middle of February, the rate stood at 1.3588.

 

Year-to-date performance of the Singapore dollar

 

Source – Bloomberg

This appreciation has taken place despite the unexpectedly poor performance of Singapore’s economy. The last quarter of 2018, saw the country’s gross domestic product grow at only 1.6%. The previous quarter had registered a far higher growth rate of 3.5%.

Why is the Singapore dollar holding up despite the economy’s lacklustre performance? There are two primary reasons:

⇨ Singapore is a safe haven for Southeast Asian countries. Inflows into the country from the region will ensure demand for the Singapore dollar.

⇨ Singapore’s economy is one of the strongest and most stable among emerging market nations.
 

Gold

Gold has traditionally been viewed as a safe haven asset. During times of economic uncertainty and political upheaval, investors rush towards the precious metal.

In the current year, gold’s price has already spiked y 1.73%.

 

Increase in gold prices January 1, 2019, to February 14, 2019

Source – Bloomberg

What does the rest of the year hold? According to Samuel Siew, Investment Analyst of Phillip Futures, they remain optimistic on gold for various reasons, and are of the view that it may revisit previous highs of U.S.$1,375.

Reasons include a softer global economic outlook, heightened geopolitical risks and the relative weakness of the US Dollar compared to 2018.  Should such an unexpected turn of events occur, it could test the key psychological resistance of U.S.$1,400.

The slackening pace of interest rate increases by the Fed will also help gold prices as will an uncertain stock market.
 

The bottom line

It is likely that the overriding trend in the currency markets in 2019 will be the U.S. dollar’s decline. Additionally, there is a probability that gold prices will move upwards.

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