'AUD could be the best-performing currency in 2016, JPY the worst, Euro likely to surprise' - Barbara Rockefeller

BARBARA ROCKEFELLER
PROFILE
• Current Job: President at Rockefeller Treasury Services, Inc.
• Career: Holds a degree in economics from Reed College and a Masters in international affairs from Columbia University. Senior risk manager in the international division at Citibank before starting in 1990 the newsletter business.

View profile at FXStreet

Barbara Rockefeller is a foreign exchange veteran and technical analysis pioneer. She is an international economist and trader specializing in foreign exchange. She is the publisher of three daily newsletters and author of six books, including Technical Analysis for Dummies and co-author with Vicki Schmelzer of The Foreign Exchange Matrix. 

Miss Rockefeller’s newsletters are read by hedge fund managers, big bank trading desks, multinational corporation treasurers, central banks, and individuals. The morning "Daily Currency Briefing" is a synopsis of events and forecasts in spot foreign exchange.

1. What will 2015 be remembered for?

In finance, 2015 is the year the Federal Reserve initiated “normalization” of interest rates, ending the emergency measures (including QE) needed to overcome the crisis that started in 2008. We will be on the lookout for the unintended consequences of normalization, benefits as well as drawbacks. It’s of no little interest that many market participants have never lived and worked in a rising rate environment. We should assume their judgment is not as good as the judgment of those who have seen a rising rate environment.

2. Which were your most important achievements this year?

In the spot trading advisory, a gain of 79% as of December 21. In the futures advisory, the hypothetical return is 155%, despite four deeply negative months. We have never had a losing year since starting the futures advisory in 1994 and this year continues that record. The real achievement is continuing to have faith in the modelling system even after it generates painful losses.

3. What emerging issues or trends should traders prepare for in 2016?

China will continue to hold the most potential for disrupting global markets as it stumbles from a command economy and financial system to a market-based one. It’s a mistake to say China doesn’t understand free markets—the problem is that they understand them all too well and sometimes don’t like what they see (such as short-selling in the August stock market crisis). It’s very hard for those who are accustomed to state control to allow speculation and yet speculation is central to free markets. In particular, getting the onshore and offshore yuan currency markets in sync and trending in the desired direction regardless of other events is going to prove a tough row to hoe. If history is a guide, the Chinese will fumble and botch things from time to time, which will frighten others. We should have confidence China will get it right in the end, but the process will probably be messy.

4. Which will be the best and worst performing currencies in 2016 and why?

The best performing currency may well be the Australian dollar, which is starting to show some independence from commodity prices and events in China. The worst performing—after the Brazilian real—is likely the yen, which is beset by profound economic problems that neither monetary nor fiscal policy can address, including and especially the demographic problem.

5. Which under-the-radar currency pair do you expect to make a big move in 2016?

The euro is likely to surprise in 2016 and therefore also the Swiss franc. The euro has been falling against the Swiss franc since 2007, sometimes (as in January 2015) by a vast one-time amount. The Swiss franc is wrongly valued against both the euro and the dollar. The Swiss National Bank needs to come up with a different currency management scheme that results in a more realistically priced Swiss franc.

6. Which macroeconomic events will have the biggest impact on the FX markets in 2016?

The big question is whether inflation can rise when oil prices are falling and likely to remain low for most or all of 2016. Central banks pretend that because oil and other commodity prices are so volatile and outside their control, “core” inflation measures are a better policy tool. But sensible economists admit that the follow-on effects of oil prices are deep and wide. Central banks are unlikely to hit the universal 2% target even as unemployment falls below 5% in the US—just as it did in Japan over the past two decades. We desperately need different and better measures of inflation if we are to avoid accepting secular stagnation as the fate of all advanced economies.

7. Which asset class will cause the next financial crisis?

Oil will continue to be the central asset class, along with other commodities, especially industrials like copper. So far the drop in oil prices is a function of a supply glut, but every once in a while, some analysts deduce that the drop must have a demand component, too, and thus the world must be sinking into recession. 

This is probably not true but it’s a thesis that can grab the imagination, especially if we see any big companies fail. We might also see some big countries fail, too, such as Venezuela. We always face the possibility of mismanagement at some firm resulting in failure that then becomes contagious across asset classes, as in the failure of Long-Term Capital arising out of the Asian financial crisis. Now that the world is thoroughly connected, we can’t know which event will ricochet into other events, the so-called pinball effect. Who knows, a brokerage failure in (say) China could bounce into the US or UK brokerage world, setting off giant sell orders not actually related to the underlying assets.

8. What will you be focused on next year?

One of the biggest questions for 2016 is whether the ECB will have to use the other arrows in its quiver to enlarge and extend QE. The ECB famously declined to enlarge QE at the December policy meeting, considered the Draghi Disappointment, but in the end, saving enlargement in case it’s needed was the right course of action. The US had to enlarge and extend, as has Japan. 

The yield differential “should” favor the dollar but there is a fly in that ointment—the US fixed income crowd. Who is right about the pace and extent of US rate hikes, the bond market which sees two or the Fed, which sees four? The central question is confidence in the Fed’s ability to project economic developments. The bond market vs. the Fed is turning into a titanic battle of wills. A favorable differential is not dollar-supportive at low numbers (up to 3%) when the yield curve keeps flattening.

9. Who are the people to watch in 2016 in terms of impact on the industry?

The single most important person in the finance world is Mario Draghi. He always tells the truth, even if we can imagine it’s not the whole truth. We have never had so much confidence in a central bank chief in living memory. It is entirely correct and useful to hang on his every word.

Stanley Fischer, vice-chair of the Fed, also has useful things to say from time to time. He is the head of a committee on global financial stability. His May speech about the responsibility of the US as the issuer of the top reserve currency got little attention but foretold the September delay in the first hike.

10. What are your New Year's resolutions?

The one big missing factor in foreign exchange is volume. We get the CFTC Commitments of Traders report every week, but it’s many days late and covers only a small fraction of the overall market. Other than the COT report, we never know whether a big move was triggered by a slew of orders indicating a change in sentiment or an aberrant one-time order that scared everybody else and set off profit-taking or another position-adjustment. Every once in a while, an observer of the FX market can get a feel for when a move is a true change in sentiment or just a position adjustment, including a prolonged one that seems like an authentic trend reversal. 

This “feel” is rare and can’t be counted on. The new year’s resolution is the same as it is every year—to read between the lines or to spend a few more minutes chart-reading to get that sense of what is really going on. We like to say that chart-reading is trying to read the mind of a mindless entity, the “market,” but every once in a while, it does happen.