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If the main macro theme of 2014 was the broad based dollar strength, the general consensus for 2015 is for further appreciation of the dollar. The implication of a strong dollar, and with the pick up in volatility, have also set in motion other trends, like the bearish commodity trends(see Metals and Oil), the carry trade has died (see AUD/USD and NZD/USD) and last but not least EUR/USD has finally started trading to the downside.
The broad based dollar strength can have a big impact on US economy, like lower inflation and this can be the trigger, next year 2015, for a considerable correction in the equity market but without altering the secular bull trend. I'm making a bold call here that the equity market will have a severe correction in 2015, once we complete a PI cycle from the 2007 high. "PI" the magic number has the following significance:
- PI=3,141;
- Multiply (Pi)*1000=3141;
- 3141 days equal 8.6 year;
- If you add 8.6 years to the 2007 high it bring us to October 2015 as the next intermediate top.
Because of the dollar's role as the world's primary reserve currency, the impact of the broad based dollar strength can trigger some "consequences" in other part of the world such as faster stimulus in Europe and in this regard my top trade for 2015 remains short EUR/USD.
Before to analyse any other pair I think it's very important to have a look just at the dollar itself as every move in the FX world will be determined by the scale of the USD rally.
- US Dollar Outlook
There is no need to reiterated the fact that I was bullish on the US Dollar, since beginning of the year when the market was still moving nowhere. My pleading for a US Dollar bullish trend is still the same and you can find some of the reasons and arguments behind my view here: The Case for a Multi-Year USD Bullish Trend and here: The Case for a USD Bullish Trend EUR/USD Outlook. and here: US Dollar in the Spotlight
Figure 1. 2014 Volatility across different asset classes
The prospects of higher US interest rates and with the FED moving towards interest rates normalization cycle coupled with Europe easing cycle and China tightening monetary policy and Japan QE, will cause investors to move towards higher-yielding markets. If 2014 we only had one episodic of higher volatility (see Figure 1) this is about to change as this divergences in monetary policies among developed economies will be the precursor of even higher volatility in 2015. All this are arguments for the US Dollar to continue strengthening in coming years as this is just the beginning of this new bullish cycle (see Figure 2)
Figure 2. Dollar trade weight cycles
Tighter monetary policies in the US will be the trigger for a massive covering of long-term positions in currencies, equities, and bonds. Usually the bonds market start selling off 3 months before the first rate hike cycle. Current FED rates projects the first rate hike in July 2015 so based on this, the US bonds should be shorted in April 2015. As bonds go lower, short term rates will go higher and this alone will be another factor in favor of US dollar strength (see Figure 3)....................................
If you would like to continue reading further please go the the Article contest page here: 2015 Global FX Outlook
Best Regards,
Daytrader21
