Forex News – Looking back: what worked and what didn’t in FX during 2013
December 31, 2013 12:11 pm
The benefit of hindsight is a wonderful thing as one can calmly look back and review what happened without fear or worry of being proven wrong. In addition, for traders, the review of past events and their influence on the market is of paramount importance. Sadly this is often neglected in favour of looking at day-to-day or hour-to-hour movements and developments rather than stepping back and looking at the bigger picture.
Looking at the performance of major forex pairs during 2013, one particular conclusion jumps out. Short yen was a winning strategy that produced spectacular returns during the year. This was related to the new economic policies of Japan. With the urging of the newly elected Prime Minister Shinzo Abe, the Bank of Japan started an unprecedented program of quantitative easing in April of 2013 which runs at an annual pace of around 13% of GDP. This is the biggest such program among major economies. The scale of the monetary expansion meant a weakening of the yen, which would in turn boost Japan’s export prospects and eventually push inflation higher in the stagnating economy. The Japanese stock market also rallied by 57% as a result.
Long euro versus the yen was the best performing fx trade out of the majors with a gain which exceeded 27.2%. The euro also managed to be strong against both the US dollar as it rose around 4.3% and against the pound, against which it gained 2.65%. The euro’s performance surprised many analysts, as the Eurozone is still struggling with its own debt crisis and the policies of austerity and structural reform will result in slow economic growth at best in the coming years. High unemployment is a particular strain on Southern European periphery countries. However, helped by the liquidity provided by the European Central Bank and Mario Draghi’s pledge during the previous year to do “whatever it takes” to save the euro, the government bond yields of countries such as Spain and Italy remained well contained during 2013. The major positive news that helped the euro was the exit of the Eurozone from recession during the second quarter of 2013, as well as the distinguishing feature of the European Central Bank that it never engaged in Quantitative Easing – unlike the Fed, the Bank of Japan and the Bank of England.
The US dollar was expected to do well during 2013, as analysts expected decent economic performance from the world’s biggest economy and that the Federal Reserve would gradually have to reduce monetary stimulus. In the end, the so-called tapering of Fed stimulus only came at the end of the year in December, whereas it was being talked about since May. Without this delay, one could speculate that the dollar would have done better. Another factor that might have hurt investor sentiment towards the dollar in the short-term was the Federal government shutdown in the US during October and the fight about the debt ceiling. The shutdown and the debt ceiling fight did not appear to hurt the economy much as unemployment fell to 7% by the year-end and economic growth for 2013 as a whole is expected at around 1.7%. It is worth mentioning that many analysts are also optimistic about the dollar during the New Year. The dollar did very well against the yen, against which it rose 22%, but posted negative performances against the euro and the pound. The trade-weighted dollar index was up just 0.40% during 2013.
Finally with respect to the pound, it was truly a year of two halves. After the pound hit a 3-year low against the dollar in early July, growing evidence of strong economic performance in the United Kingdom attracted investors to UK assets. Property prices were particularly strong. The pound rallied as unemployment fell in the direction of the Bank of England’s forward guidance level (7%) after a which an interest rate increase would be considered. Inflation was also running higher than other developed economies. The emergence of the Eurozone from recession could have been a major factor that also helped the UK recovery. By the end of the year the pound eked out a small 1.7% gain against the dollar, whereas it lost 2.6% against the euro.
The benefit of hindsight is a wonderful thing as one can calmly look back and review what happened without fear or worry of being proven wrong. In addition, for traders, the review of past events and their influence on the market is of paramount importance. Sadly this is often neglected in favour of looking at day-to-day or hour-to-hour movements and developments rather than stepping back and looking at the bigger picture.
Looking at the performance of major forex pairs during 2013, one particular conclusion jumps out. Short yen was a winning strategy that produced spectacular returns during the year. This was related to the new economic policies of Japan. With the urging of the newly elected Prime Minister Shinzo Abe, the Bank of Japan started an unprecedented program of quantitative easing in April of 2013 which runs at an annual pace of around 13% of GDP. This is the biggest such program among major economies. The scale of the monetary expansion meant a weakening of the yen, which would in turn boost Japan’s export prospects and eventually push inflation higher in the stagnating economy. The Japanese stock market also rallied by 57% as a result.
Long euro versus the yen was the best performing fx trade out of the majors with a gain which exceeded 27.2%. The euro also managed to be strong against both the US dollar as it rose around 4.3% and against the pound, against which it gained 2.65%. The euro’s performance surprised many analysts, as the Eurozone is still struggling with its own debt crisis and the policies of austerity and structural reform will result in slow economic growth at best in the coming years. High unemployment is a particular strain on Southern European periphery countries. However, helped by the liquidity provided by the European Central Bank and Mario Draghi’s pledge during the previous year to do “whatever it takes” to save the euro, the government bond yields of countries such as Spain and Italy remained well contained during 2013. The major positive news that helped the euro was the exit of the Eurozone from recession during the second quarter of 2013, as well as the distinguishing feature of the European Central Bank that it never engaged in Quantitative Easing – unlike the Fed, the Bank of Japan and the Bank of England.
The US dollar was expected to do well during 2013, as analysts expected decent economic performance from the world’s biggest economy and that the Federal Reserve would gradually have to reduce monetary stimulus. In the end, the so-called tapering of Fed stimulus only came at the end of the year in December, whereas it was being talked about since May. Without this delay, one could speculate that the dollar would have done better. Another factor that might have hurt investor sentiment towards the dollar in the short-term was the Federal government shutdown in the US during October and the fight about the debt ceiling. The shutdown and the debt ceiling fight did not appear to hurt the economy much as unemployment fell to 7% by the year-end and economic growth for 2013 as a whole is expected at around 1.7%. It is worth mentioning that many analysts are also optimistic about the dollar during the New Year. The dollar did very well against the yen, against which it rose 22%, but posted negative performances against the euro and the pound. The trade-weighted dollar index was up just 0.40% during 2013.
Finally with respect to the pound, it was truly a year of two halves. After the pound hit a 3-year low against the dollar in early July, growing evidence of strong economic performance in the United Kingdom attracted investors to UK assets. Property prices were particularly strong. The pound rallied as unemployment fell in the direction of the Bank of England’s forward guidance level (7%) after a which an interest rate increase would be considered. Inflation was also running higher than other developed economies. The emergence of the Eurozone from recession could have been a major factor that also helped the UK recovery. By the end of the year the pound eked out a small 1.7% gain against the dollar, whereas it lost 2.6% against the euro.
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