You don’t need me to tell you that FX forecasting is one of the hardest games in town. I say that as someone that has spent a lot of my career in the rates and macro environment. But I also know that looking back is an important part of learning from the past and also from the logic one applied 12 months ago.
Like many, I was looking for dollar strength in 2014, although it was labelled ‘conditional dollar strength’. By this I meant that the dollar was not going to run away to the upside and especially in the first half of the year. This largely held for the first few months, with the second half of the year gains (nearly all in Q3) surpassing expectations.
In terms of the majors and looking at the quarterly forecast profile from last year as compared to consensus and actual, the best outcome was the euro. I didn’t succumb to euro negatively early on and with the steady dollar tone, this meant that H1 forecasts were fairly accurate, although this was partially offset by the extent of the weakness seen in the second half. Sterling has been slightly onside overall, with a very good Q1 hit. The misses were the Aussie (anticipated weakness not coming through until December) and the yen, where the extent of the weakness was concentrated at the end of the year. Finally, I was a little too bearish on gold (seeing a move to USD 1,000 before recovering), but as with previous years, I felt the need to speak as this is one commodity where noise and hyperbole are offered in near unlimited quantities.
Last year, I focused on the underlying dynamics of FX markets, pointing out that we had moved to far less trended markets and this was likely to change in 2014. As always with FX, things are never smooth, so whilst that shift in dynamic did happen, it was very much concentrated in the second half of the year. The dollar had its longest weekly run of consecutive gains since the gold standard finally broke down in the early 1970s.
Ultimately though, this dynamic is difficult to sustain without moves in underlying interest rates, because this is what drives longer-term divergences on major and liquid FX pairs. So, if you think 2014 was hard, then come and meet 2015.