An Early Look At The Best Currency Trade For 2015

The currency markets have seen some big moves in 2014 and in many ways they have provided better opportunities for forex traders than stock markets have.

While the S&P 500 is currently up around 13% year-to-date, volatility has been low for most of that time and most shorter term traders have struggled to make profits in individual equities this year.

Currency trends

In contrast, the currency markets have seen some spectacular moves and trend followers have been handsomely rewarded for sticking to their trades:

  • We have seen USDJPY soar past the 120 level under the Bank of Japan’s aggressive monetary easing policy, the highest level in five years.
  • We have watched GBPUSD climb to 1.70 in the first half of the year (when analysts were predicting end-of-year rate hikes from the BOE), only to see it reverse twice as fast and drop through 1.55.
  • And we have seen the greenback rally against the majority of its peers as markets began to price in the possibility of 2015 rate hikes from the Fed.

Without doubt it has been a good year to be long the dollar.

However, with the greenback having come such a long way in such a short space of time, one of the key questions for 2015 will be whether the dollar has any more upside left to go.

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Fundamental indicators

A useful method for analyzing the longer term direction of currency markets is to first consider the fundamental indicators for each market at the present time. After this is done we can then begin to analyse future trends to decide where markets might head.

One way to do this is to look at country specific economic data. The next table is derived from stats from tradingeconomics.com:

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 When will the Fed raise rates?

A common belief among traders at present is that the Federal Reserve will likely move to raise interest rates some time in 2015, and markets currently expect this to occur in July.

On some levels this makes sense. The Federal Reserve have already stopped their program of monthly asset purchases and the US economy now appears strong enough to withstand a gradual increase in rates.

However, an important distinction is that the inflation rate in the US is still fairly low at 1.70% and this leaves policymakers some room to maneuver on raising rates.

So long as inflation remains below 2%-3%, the Fed are likely to keep rates low. It’s possible therefore, that markets have gotten ahead of themselves in pricing in July 2015 rate hikes.

A different situation

Another important factor to consider as we move into 2015 should be the economic situation in China, as well as the price of commodities such as crude oil.

Some analysts have suggested that the drop in oil could actually be contractionary for the US dollar, meaning the US economy could soften in the first two quarters of 2015. As well, falling oil prices will no doubt see US inflation figures remain low.

Again, calls for July rate hikes may therefore turn out to be premature.

It’s also no secret that China’s economy is slowing. This is another bad sign for commodity linked currencies such as the Australian dollar and Canadian dollar.

Conclusion

Taking into account the economic data above and the points mentioned, traders should expect some sort of reversal for the dollar in the first couple of quarters of 2015 as traders scale back their bets for Fed rate hikes.

One way to play this would be to buy GBPUSD. The currency has been one of the weakest performers in 2014 and is looking oversold on nearly all timeframes. The UK economy should be more sheltered from a slowdown in China, therefore, GBPUSD may be the best option for traders looking for a reversal in the dollar.

Overall, 2015 promises to be a much more difficult year for currency traders.

 

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