A look at what lies ahead for the ruble, euro and dollar this year
Market participants are braced for the turbulent 2020 year for obvious reasons. Investors are still fretted about the prospects of a recession in the US economy that could spill over to other parts of the world.
The Fed's officials try to reassure the markets and downplay the risks of a recession. Nevertheless, investors take such remarks with a pinch of salt. Indeed, there is a slim chance of a downturn in the US economy.
However, no one can say this chance is virtually nil. This scenario provides a clue to further developments in financial markets and on Forex in particular.
As it always happens, the US dollar asserts strength in the time of economic and financial turmoil in the US for a simple reason. The American financial sector is the largest investor in the global economy.
As soon as the US slips into financial troubles, its banks, investment, and pension funds usually act following the same solution. In fact, they rush to close all their positions in overseas financial markets.
This triggers a massive inflow of foreign capital to the US, thus boosting demand for the US dollar. The thing is that US investors want to play safe amid the growing likelihood of a recession in the domestic economy.
In other words, recession fears are a catalyst for
the US dollar's advance during the whole 2020.
Outlook for the Federal Reserve's policy 2020
The second weighty argument for the US dollar's strength is the Federal Reserve's policy. Jerome Powell seems to be poised to take a pause in cutting the official funds rate.
At the same time, a dynamic of consumer inflation and the conditions of the labor market indicate that the time is ripe for a rate hike.
Besides, scrutinizing US macroeconomic data, experts voice concern over nonstop growth of US business inventories.
This warns of mounting risks of an overproduction crisis. Another factor to bear in mind is that the Federal Reserve traditionally raises the refinancing rate amid the first sings of an economic crisis.
Meanwhile, the US central bank prefers a cautious approach. It will hardly take drastic measures at least until the early Autumn. The regulator is going to act as appropriate, especially in case the financial markets will burst into extreme volatility.
Such a roller coaster usually ruins investors' confidence, so that the US dollar could briefly slump in value.
Notably, the greenback's weakness is a temporary effect in such situations that has always happened during the market turmoil. Eventually, the US currency is sure to recover for the above-said reasons.
EUR doomed to failure?
So, most market participants are betting on the US dollar's strength. On the other hand, the outlook for the euro is not so clear-cut. In view of the large-scale financial market in the US as well as the Fed's crucial impact, the single European currency will have to join other global currencies. In other words, the euro is likely to lose ground.
Nevertheless, the EU economy is rather advanced, thus being able to resist headwinds from the United States. Interestingly, the ECB is still hesitating to announce the normalization of its monetary policy.
The central bank has been holding its interest rates below zero for long with occasional rate cuts. In this context, there is a fair chance that the refinancing rate will be also made negative. This scenario arouses concerns among investors.
On the plus side, there is one fundamental which is sure to prop up both the eurozone's economy and the shared currency. The landslide victory of the Conservative party in Great Britain opened the door to the UK's departure from the EU.
Brexit means that trade relations are set to be morphed among the countries inside the euro block. In essence, the British capital will be squeezed out of the market through reinforcement of the German capital in parallel.
If German companies enlarge their market share, they will boost their profits, thus improving domestic economic conditions. So, a revival in the largest eurozone's economy will enable the whole euro area to gain momentum.
This factor will certainly support the single European currency. Of course, this support is not enough to cushion the euro from protracted weakness. Nevertheless, the euro will offer better investment opportunities than other global currencies.
The only factor to encourage strength of the shared currency is a cardinal change in the ECB rhetoric. If ECB President Christine Lagarde ventures to increase interest rates, the single European currency will advance across the board, including the US dollar.
Bank of Russia aims to reduce demand for RUB
The Russian ruble is set to face a challenge in the coming year. The main bearish factor for the ruble will be the monetary policy of the Bank of Russia.
No doubt, the regulator will come up with more rate cuts that will inevitably reduce yields of the government bonds. In turn, European investors will shift focus away from buying Russia's debt securities.
Anyway, an interest rate gap is going to taper slowly but surely, taking the shine off the ruble. However, this factor will not produce an immediate effect. This is the case when the effect will manifest itself in the late year, having accumulated in the course of time.
Besides, there are other factors which fester the ruble's weakness such as a slowdown in the global economy, lower demand for commodities, and waning volumes of international trade.
Nevertheless, the Bank of Russia will be unwilling to employ fiscal instruments for supporting the ruble's value, though there is something in its arsenal.
For instance, the Bank of Russia could intervene in the currency market. However, experience of global central banks proves that forex interventions put off the effect of the national currency depreciation, though intensifying the effect.
Another measure is raising interest rates that will inevitably hurt the overall domestic economy. Bearing in mind policy moves of the Bank of Russia in recent years, the regulator will hardly resort to any of such measures.
In all likelihood, it will let the ruble follow the downward trajectory. As a result, no jolts are expected at least until the Autumn. The most probable scenario is that the ruble is likely to drift lower with occasional leaps in value.
Starting from the Autumn, the ruble is expected to make sharp swings due to global headwinds and the cumulative effect of monetary easing by the Bank of Russia. All in all, the ruble has gloomy prospects for 2020.
This article was submitted by Alexander Davydov and Mikhail Makarov, InstaForex analysts.
