Every year sees global currencies jostle for position, although lately it has been a race to the bottom, with more than 30 central banks around the world cutting interest rates in a desperate bid to avoid falling into recession.
Low interest rates typically mean a weak currency, as investors can get a better return on their money elsewhere.
The mighty US dollar remains the one to beat, even though the Federal Reserve cut interest rates three times last year as the economy slowed. The British pound had a bumpy 2019 but ended the year higher, while the Canadian dollar held strong, the Chinese yuan and Indian rupee weakened, and Bitcoin was all over the place, as usual.
What happens next depends on how the global economy performs in 2020, and how intense the conflict between US and Iran becomes. Geopolitical worries typically have investors rushing around to find a safe home for their money – and right now the Japanese yen is the beneficiary.
So which currencies are likely to be the winners and losers in 2020?
US dollar (USD)
The US dollar remained strong in 2019, but it may have finally reached its peak, says Nannette Hechler-Fayd’herbe, head of global economics & research at Credit Suisse.
“It will initially continue to benefit from its rate advantage and remain on a solid footing. However, as trade-related uncertainties abate and the economic recovery broadens beyond the US, in particular Europe, we think the US dollar should peak against other more cyclical currencies such as the euro,” she says.
Jason Hughes, head of global sales at Abu Dhabi-headquartered financial services firm ADSS, believes the US dollar still has an edge.
“Given negative interest rates in the eurozone and Japan, the market has taken a view that [the] US remains in the strongest position to raise rates faster than anyone else when conditions are right,” he says.
Rajiv Raipancholia, chief executive of Orient Exchange and treasurer of the Foreign Exchange and Remittance Group (FERG) in the UAE, says politics may also drive dollar strength. “2020 is a year of election; both the Republican and Democratic parties agree that a stronger dollar is in the best interests of the country,” he says.
Ugo Lancioni, head of currency management at Neuberger Berman, says the US dollar may now be overvalued but is supported by import tariffs and lacklustre growth in the rest of the world.
“Should we see global economic activity pick up and a scaling back of import tariffs, we would expect the US dollar to depreciate towards fair value,” he says.
Chris Beauchamp, chief market analyst at online trading platform IG, says the greenback is reaching crunch point against a host of global currencies, with the dollar index hitting its lowest level since mid-July.
“It is time that the optimism around the global economy was spread around a bit more, and the relative gains in currencies like the euro, sterling and Australian dollar are a reflection of this," he says.
Outlook: The dollar may have peaked, but is still the one to beat.
Pound sterling (GBP)
The British pound had a rollercoaster ride in 2019, plunging in the summer as fears of a no-deal Brexit grew, only to soar in the run-up to Prime Minister Boris Johnson's election landslide victory in December, amid hopes the Conservative Party would win a healthy majority and fulfil his promise to "get Brexit done".
Then it dipped again, as traders banked their ample profits and Mr Johnson set himself a rigid deadline of completing a trade deal with the European Union by December 31, 2020, once again raising the spectre of a no-deal departure. It nonetheless ended the year up around 1.5 per cent against the US dollar and around 3 per cent against the euro.
Mr Hughes of ADSS says sterling will now be driven by trade talks, particularly over issues such as treatment of the UK’s vital financial services sector. “We will probably see another cycle of volatility in 2020,” he says.
Andy Scott, associate director at financial risk advisory firm JCRA, said the slowing UK economy could force the Bank of England to cut interest rates next year, a threat markets have largely overlooked. “The performance of the economy will determine whether the pound sees a further recovery in 2020,” he says.
Outlook: Sterling is a wild card. A no-deal Brexit could sink the pound but a satisfactory trade deal and stronger economic growth would send it to the stars.
Euro (EUR)
The euro has been squeezed by slow growth and the European Central Bank's move to push interest rates further into negative territory by cutting them to -0.5 per cent in September, while announcing €20 billion (Dh82bn) a month of quantitative easing.
Mr Raipancholia of Orient Exchange expects further loosening, which may drive down the euro in 2020. “The eurozone has been hit by weaker global trade and growth in its main trading partners,” he says.
Neuberger Berman’s Mr Lancioni sees signs of stabilisation, albeit at a low level. The eurozone still boasts a positive current account and this is likely to prevent serious decline. “If economic data improves, we are likely to see a reversal of recent depreciation versus the US dollar,” Mr Lancioni says.
Outlook: The euro should just about hold its own.
Japanese yen (JPY)
The Japanese yen is a safe haven currency, because the country’s large current account surplus offers protection when storms hit the global economy. So when the yen rises, it is seen as a warning of trouble ahead. And when it rises rapidly, as it did during the Russian default crisis in 1998 and the global financial crisis in 2008, alarm bells really start ringing. Many will therefore be concerned by its recent rapid surge.
After steadily climbing in the final days of the year, as surveys pointed to a slowdown in European and Chinese manufacturing growth, the yen spiked on rising Middle East tensions. It was the best performing currency in December, ending the month around 7 per cent higher.
Mr Lancioni says the yen has been undervalued but that may change if current uncertainties worsen. “If we saw a further fall in global yields, or repatriation of foreign holdings, we could see the yen appreciate significantly,” he says.
Fawad Razaqzada, technical analyst at Forex.com, says the yen's performance may also depend on the country’s fiscal policy. “Speculation is growing that the Bank of Japan may unleash more monetary stimulus in 2020. If it does, the yen could come under further pressure," he says.
Outlook: It would take a global shock to fire the yen. We might just have one.
Canadian dollar (CAD)
The Canadian dollar was one of the strongest currencies of all in 2019, as the Bank of Canada has kept rates on hold.
However, Mr Lancioni says the ‘“loonie” [the nickname for the Canadian $1 coin] now looks overvalued, and the growth differential is expected to narrow against the rest of developed economies in 2020. “We do not believe the Canadian dollar will fare as well in 2020,” he says.
Outlook: This solid performer may struggle to climb higher.
Chinese yuan (CNY)
The outlook for the Chinese yuan rests on the US-China trade war, Mr Lancioni says. The currency is managed by the Chinese monetary authorities and is therefore partially determined by political factors. Domestic growth has slowed but policymakers have acted quickly to support domestic demand.
However, high debt levels and the anticipated shift from a structural current account surplus to a deficit could hit the yuan, Mr Lancioni says.
Ms Hechler-Fayd'herbe also expects "a modest currency depreciation against the US dollar in 2020", citing China's declining current account surplus.
Outlook: The yuan could come under pressure.
Australian dollar (AUD)
The Australian dollar weakened in 2019 as the economy slowed and unemployment increased, although there were signs of a recovery as the year drew to a close.
Mr Raipancholia expects the Australian dollar to strengthen slightly as the country's trade with China looks set to improve.
Outlook: The Aussie could be on the up.
New Zealand dollar (NZD)
Gaurav Kashyap, head of futures at Equity Global Markets in Dubai, says the Kiwi dollar performed poorly in 2013, falling around 1.3 per cent due to uneven economic growth and stagnant inflation. “As a result, the Reserve Bank of New Zealand cut the official cash rate on two occasions to 1 per cent,” he says.
Mr Kashyap remains bearish in 2020, despite a recovery in the fourth quarter to USD$0.66. “While lower rates and an uptick in government spending will support demand, global economic uncertainties, lower interest rates and weaker price action will limit any hawkish actions of the New Zealand dollar.”
Any pickup may have to wait until after November’s election. “I would look to 2021 and beyond for concrete consolidation above $0.70 levels in a best-case scenario,” he says.
Outlook: The Kiwi looks unlikely to fly this year.
Indian rupee (INR)
2019 was a big year in Indian politics, with Prime Minister Narendra Modi winning a second term and his BJP party sweeping the elections.
Now attention will turn to the Indian economy, where growth is slowing to a six-year low of 4.5 per cent.
This forced the Reserve Bank of India to cut rates in 2019, and with difficult economic conditions set to persist, Mr Kashyap expects the rupee to weaken further.
Outlook: Indian rupee could be heading for a fall.
Bitcoin
Bitcoin had another volatile run in 2019, starting at around $3,800, flying to more than $12,000 then crashing to below $7,000 as the year closed. Yet, despite its volatile nature, many investors see the cryptocurrency as a store of value in times of political uncertainty so like the Japanese yen, it has also benefited from the latest turmoil in the Middle East, and at time of writing its price has leapt above $7,500.
Mr Hughes says the volatility of cryptocurrencies offers plenty of opportunities for traders, even though the early mania has passed. “However, until the financial services industry finds a proper use for cryptocurrencies as a store of wealth or for transactional purposes, they will remain a purely speculative product,” he says.
Outlook: From here Bitcoin could go anywhere, fast.
