The year started with a currency "flash crash”, as the US and Australian dollars along with the Turkish lira plunged against the Japanese yen to raise the curtain on what analysts expect to be a hugely volatile 12 months.
Foreign exchange movements matter to UAE residents, as many internationally mobile individuals juggle two or three different currencies and make regular foreign exchange transfers.
Gaurav Kashyap, head of futures at EGM in Dubai, says the fear factor is back after the stock market meltdown of 2018 that saw equities slide amid trade war worries and a slowing global economy. And currencies are also feeling the heat.
Several market-moving events are coming to a head this year, notably the US-China trade war and Brexit. “The US Government shutdown, the prospect of further interest rate rises from the Federal Reserve, tighter European Central Bank (ECB) monetary policy and elections in India are also adding to the uncertainty," says Mr Kashyap.
So which currencies will fare the best in 2019?
Mr Kashyap suggests US dollar strength will continue as investors seek a safe haven for their money, which would be good news for UAE residents sending dollar-linked dirhams to their home countries.
The US Federal Reserve increased interest rates four times last year and the big question is whether chair Jay Powell defies criticism from President Donald Trump and pushes for further increases. "If the Fed adopts a more dovish approach it could hinder my outlook for the greenback, which otherwise remains bullish for the first half of the year," says Mr Kashyap.
Russ Mould, investment director at online trading platform AJ Bell, says the dollar should shrug off concerns over the soaring budget deficit and political gridlock. "It would take a brave person to bet against the greenback in 2019, especially with the Fed likely to increase interest rates again and withdraw quantitative easing. President Trump’s desire to reduce the trade deficit should further support the dollar against the euro and sterling.”
Outlook: Another good year for the greenback.
Mr Kashyap says the euro is one to watch, particularly if the ECB increases interest rates. “However, European economic data is mixed and I do not see any form of monetary tightening before the summer,” he adds.
He believes the single currency may continue to struggle as the EU battles political challenges from Italian populists and Brexit. “It we get a hard, no-deal Brexit this could hurt both the euro and sterling.”
Outlook: A bumpy year in prospect for the single currency.
After two years of vacillation, January looks like a make-or-break month for British Prime Minister Theresa May and the pound as she faces an uphill task in persuading MPs to support her deal in the rescheduled vote on January 14.
However, Mr Kashyap believes sterling could recover strongly provided a no-deal Brexit crisis is averted, rising as much as 8 per cent against the euro, from €1.11 today towards €1.20.
Many analysts have also argued that sterling is priced for disaster and could be a top performer if the UK avoids the worst.
Outlook: Sterling could move sharply, in either direction.
Emerging market currencies were "slaughtered" last year, particularly the Indian rupee which fell 9 per cent, Mr Kashyap says. “The uncertainty may continue until elections in April and May, with the prospect of a rally in stock markets and the rupee after that.”
Devesh Mamtani, head of investments and advisory at Century Financial Brokers in Dubai, is also optimistic. "New governments in India tend to splurge in the first year potentially boosting economic growth and this makes the rupee very attractive.”
He says the rupee has been “hammered for years” but should now outperform. “A dovish Fed will help by reducing capital outflows from India and foreign exchange-related volatility,” Mr Mamtani adds.
Outlook: The rupee could enjoy a strong summer.
The Canadian dollar could be the year’s top performing currency, Mr Mamtani says. "The country's jobless rate is at a 40-year low and its economy should be boosted by the United States-Mexico-Canada Agreement (USMCA), which should strengthen business investment when it is ratified.”
Prime Minister Justin Trudeau’s plan to cut taxes and red tape should give the economy a further lift. “We expect the Bank of Canada to raise rates from 1.75 per cent to 2.25 per cent, which should also boost the dollar.”
Outlook: Things are looking up for the loonie.
Dollar strength is traditionally bad news for emerging market assets and so it proved in 2018, with crises in Turkey and Argentina triggering investor flight and further pressure expected this year.
However, Mr Mould notes that the JP Morgan Emerging Markets Currency index is trading near all-time lows. “Potential bad news about emerging market currencies may already be in the price and they could recover.”
He picks the Chinese renminbi as one to watch. “President Xi Jinping has to juggle his growth plans against the country’s growing debt mountain, currency weakness and US trade war talk. If the Chinese decide to dash for growth the yuan could be sacrificed and fall even further," says Mr Mould.
Outlook: The yuan could come under sustained pressure.
New Zealand dollar
Mr Mamtani reckons the New Zealand dollar is likely to underperform as GDP growth slips to a five-year low of just 0.3 per cent, and the Reserve Bank of New Zealand (RBNZ) imposes stricter capital requirements on the country's banks. "This will increase the cost of credit and we expect the RBNZ to cut interest rates to combat the resulting slowdown.”
Outlook: There may be dollar dismay for New Zealand.
The Australian dollar may also underperform after house prices in Sydney fell 10 per cent in a year with further drops expected, Mr Mamtani says. "This creates a negative wealth effect for households and curbs personal spending."
The slowing Chinese economy could hit demand for Australian commodities, forcing the Royal Bank of Australia to hold or even cut interest rates, hitting its currency, he adds.
Outlook: A commodity crunch threatens the Aussie.
Mr Mamtani says the Japanese yen has risen for three consecutive years and is likely to outperform this year as well. “Trade war concerns and the slowing global economy should increase its safe haven attractions.”
Outlook: Nervous investors should give the yen a further boost.