In the following paragraphs follows an analysis of the four most traded currency pairs globally, where the first currency in the currency pair is the base currency, which means when the interest rates of the base currency country’s raise, the base currency’s value rises and also when the inflation rate and the risk premium of the base currency country’s raises, the base currency’s value falls, according to the fundamental determination of the base currency fair value’s method.
EUR/USD
Although many traders and analysts predict that Federal Reserve Bank will continue to raise the interest rates in the next year, the US yield curve shows that bond traders are afraid of an imminent economic slowdown, because of its year to date big flattening, which implies low growth prospects and low productivity gains. Specifically, the current difference between the 10-year treasury bond and the 2-year treasury bond is only 26 basis points, which indicates that only a raise of interest rates by 25 basis points, if it is not be followed by strong US growth, the US yield curve will move towards inversion and a recession will follow.
The factor that point towards the appreciation of US dollar is the prospect of 2 still interest rates raises and the negative factors that point to the appreciation of Euro and consequently of EUR/USD are the imminent end of quantitative easing from European central bank, the impose of tariffs from president Trump in China and Europe, which will boost the domestic prices of US imported goods and will create inflation and finally the widening of current account balance deficit, which in the foreseeable future will have to be financed and will create big capital outflows from USA.
So, in the short term we anticipate that EUR/USD currency pair will be traded in a narrow range, in mid-term and long term to start its rally, because of the anticipated US recession and the cut of US interest rates from Fed and in the very long term US dollar to start to rise ,anticipating the disruption of Eurozone, which has the biggest structural problems in its economy and cannot compete USA, China and Russia and is threatened from the rise of nationalism.
USD/JPY
From the previous analysis is clear that US economy will have problem in the beginning of 2019 and that is threatened from stagflation, with immediate consequence the fall of US dollar to a new level in the downside for be eliminated the anticipated US fiscal imbalance in its balance of payments.
Also, Yen has started to outperform because of the break of the highly speculative carry trade in Emerging markets currencies, because traditionally as the lowest yield currency is used as a funding currency in speculative positions. Also, Japan runs a surplus in its trade balance, which contributes to the outperformance of Japanese Yen. So, in the short term we anticipate USD/JPY to trade in a narrow range and in the mid-term and long term to fall to a new level.
GBP/USD
Great Britain is in a transition period and must be prepared for its exit from European union, which will not be without consequences and in the short term will create social and economic noise, because Great Britain will be threatened with exit from the common market of European union and the privileges of its participation in the European union.
The most dangerous result will be London to lose its dominance as the financial center of Europe. So, based to the fact that US economy will face a big fiscal imbalance in the next 9 months and US economy is one fourth of the global gross domestic product, we anticipate GBP/USD to be traded in the short term in a narrow range, but in the mid-term and long term to have an uncertain direction,due to the incident that if there is a global turmoil in markets, European union will use all of its strict measures to prevent the exit of Great Britain from the European union .
AUD/USD
Australia’s economy has big exposure in Asian economies and specifically in China.However, its economy has started to show signs of weakness. The reading of its manufacturing index for the month of August fell almost five points, which indicates a big worsening of its economy trade’s terms and competitiveness and its big trading partner China has started a trade war with USA, which will force China in the mid-term to devalue its currency, to burn more of its foreign currency reserves and face lower growth prospects with immediate consequence the fall of Australia’s economy in an economic slowdown.
So, we anticipate the AUD/USD currency pair to be traded lower in the mid-term and long term and in a narrow range in the short term.
