2008 Currency Predictions - January 2008

Posted by Allison on 13 April 2009, 11:13

Forex is the largest trading market in the world. The value and volumes of currency traded dwarf their nearest market rivals by many orders of magnitude. In forex there is always something interesting going on, and people that are aware of what is happening – and what this means for exchange rates – are ready to profit (or avoid a loss).

2007 saw some huge developments in the forex market – some of them seemingly unforeseeable (like the dramatic fall of the USD) some of them a predictable consequence of world or local events (the continued slide of the Zimbabwe Dollar). It makes you wonder how much better your 2007 trading year could have been if you had been armed with a set of predictions for the year in advance ...

Just for the record: the following is for fun only, and while every attempt has been made to make accurate predictions based on sound logic, you should not use this as an forex trading template unless you do your own Due Diligence and come to the exact same conclusions.

1. The Yen will fall from Q2 when Japan make surprise interest rate cuts – possibly even ending up back down at zero percent by the end of Q3.

Japan will start to worry about the rising value of the JPY Yen compared to other falling currencies; reflect on how this is impacting their exports (badly); find that consumer sentiment is low and could do with a boost; and realise that something the Japanese (economic) nation has been crying out for – a healthy dose of inflation – can be increased, if they cut their rates back down. If this happens it would be very good news for the world economy too, as the Yen is such an important currency for the carry trade where a trader borrows Yen at a low rate and invests it in a higher yielding currency.

2. It will probably, at some point during 2008, look like it is “the end” for Mugabe and the Zim Dollar (ZWD) will stabilise, or even rally briefly. This will be short lived as, if history is any indicator, shifting someone like Mugabe from power is nigh on impossible. After a few weeks or a month of hope, “normal service” will resume and the Zim Dollar will continue its slide into despair along with the hopes and dreams of this great African nation.

3. South American Currency trading will become more popular, and fortunes will be made and lost on the emerging market currencies of Brazil, Mexico, Peru and Chile. Volumes of some South American currencies traded will double during 2008.

4. The value of the Chinese Yuan (CNY) will continue to rise. This will act as a natural brake on the Chinese economy to stop it from super-heating and as such no steps will be taken to prevent this from happening so long as the rate of appreciation remains steady.

There will be a minor pull back in the value of the Yuan after the Olympic games followed by more steady, modest increases in its value towards the year end.

5. The USD will continue its falls and inflation in America will reach giddy heights.

There will at some point be a minor “Gas Crisis” where people fill up their tanks and spare containers today, because they know that next week the price of gas will have gone up by another 10%. Americans will complain on the UK News that it now costs them $3.50 a gallon, and all over the UK hard working men and women will fling their beans-on-toast at the TV since the US prices are actually very low in comparison.

6. The FED's interest rate cuts; the attendant fall of the USD dollar (which will make American exports cheaper and make America a cheap holiday destination) and of course the inflation that it generates WILL be enough to stave off a full-blown US recession. The big unknown is whether the cure is worse than the disease and what new monster awaits in 2009 ...

7. At some point there will be a minor clamour for commodities to be priced in Euro as the Euro remains both fairly stable and fairly strong throughout 2008. Nothing will come of the clamour unless the Oil Producing Gulf States throw their weight behind the idea, which is unlikely to happen.

If it did happen the Euro would be in for some sharp rises and the USD would drop like a rock.

8. GOLD (XAU) will push up through $1150 by mid 2008

9. There will be jokes by commentators at the Beijing Olympics along the lines of “Wow Bob, with all those medals he could buy a street – heh heh”, “Are you kidding me? With all those medals he could buy the whole of Manhattan and still have enough change left to buy Ohio! Heh-heh.”

10. Gold prices will come off their highs in dramatic fashion and many traders will be caught unawares.

In simple terms there is a growing disconnect between gold's value as a consumable resource (physical gold - like oil or cotton) and as an instrument – paper gold, XAU, gold as a hedge against the falling USD/ inflation.

The price of gold has risen dramatically, meaning it is more economically viable to mine more gold, even if it costs more to get out of the ground, meaning that the quantity of gold being produced is increasing; the supply of physical gold is increasing.

But the volume of gold being consumed is not increasing. Q4 2007 should have been a bumper time for gold consumption, but it wasn't. High prices meant that people who would normally physically buy the shiny metal did not, yet prices continue to rise as speculators and people looking for a “safe bet” in troubled times push gold ever higher.

With supply growing and demand shrinking the economic balance is out of whack. As we have seen in the past with the Tech Bubble, and Housing Bubble this can be maintained for a long time, but not forever.

At some point something will have to give and with commodities, the supply and demand corrections are normally sudden and brutal. Gold Prices will fall by 30%+ within a short space of time.

If even half of these predictions come to pass it will be an other crazy year for forex trading. Looking at the above predictions makes you wonder what the OTHER massive as-yet-unknown stories will be.

At the end of 2008 we can reflect and see how wide of the mark (or spookily accurate) these predictions are, but for now good luck, trade carefully and as always remember to set your safety-net up properly.