'It's worth thinking who will win in a world of cheap oil and limited inflation' - Simon Smith, FxPro

SIMON SMITH
PROFILE:
• Current Job: Chief Economist for FxPro
• Career: Holds an MSc. in Economics from the University of London and a BSc. from Brunel University. He has held economic and strategy positions with Standard & Poor’s.

View profile at FXStreet

Simon Smith has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining FxPro in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital. 

Simon has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International. He holds an MSc. in Economics from the University of London and a BSc. from Brunel University.

In the world of FX, it will be the SNB's decision to remove the cap on the Swiss franc back in January. I was at my desk and distinctly remember reading the headline on Bloomberg. My jaw dropped to the floor then EURCHF swiftly followed. It had huge implications for our industry and also lessons. The main one is that when it comes to central bankers and exchange rates, you can only believe their word for as long as it takes for them to finish the sentence which contains it. I think some had become blinded by central bank openness and guidance, but perhaps forgot that this stops when it comes to currency policy, especially caps, floors and pegs.

I think it was sticking to my guns to on the BoE and for most of the year on the Fed in expecting no change from either central bank. Pretty much every year since 2010 markets had started the year anticipating a Fed hike by year end, only to be met with a disappointing first quarter and rate hikes to be priced out. I made the point that we were not acknowledging enough the way the world had changed. It was naive to expect a return to normality. I doubted that this would be another bumper year for the dollar and for the most part it wasn't, with my cable (1.50) and EURUSD (1.12) forecasts of 12 months ago currently not that far off the mark. They may not exactly taken the route I anticipated, but at present I can be happy with the end destination.

Many will say divergence between those central banks putting rates up and those enacting more easing measures. But they said that at the beginning of 2015 and for the most part, it did not play out that way. The Fed won't tighten by as much as they currently anticipated (via so-called 'dot plots') and I don't think the ECB will enact more QE, mostly because they don't have the means to effectively do so. Oil will continue to surprise to the downside, because shale has changed the dynamics of the market in ways not yet fully understood and this will limit the recovery in headline inflation rates, meaning that the Fed will only tighten twice and the UK not at all. So it's worth thinking who will win and lose is this world of continued cheap oil and limited recovery of inflation.

I think the yen will be the one to watch and although it may struggle in the first half, I think will rise above the others in the second half. As always, there are lots of top line reasons to be bearish on the yen, but it's had 3 years of declines (trade-weighted) 2012-14 and only marginal recovery in 2015. Current account and trade dynamics continue to work in its favour and if the usual lags between them and the currency continue, it should be 2015 where the benefits are felt in the currency. On the other side, I think the Brazilian real will continue to underperform in 2016, with structural reform dragging, inflation remaining above target and further sovereign debt downgrades. It doesn't look pretty.

That's a hard one, because most of the moves from "under-the-radar" pairs come from unexpected underlying events, such as changes in currency pegs, political events etc. Naturally, EURCHF was the prime example of this in 2015. I think on the majors, GBPJPY is worth watching as sterling I think remains over-valued short-term on rate differentials, whilst the yen story could see the pair pus back down to 160, from the current 180.

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Ultimately, it's interest rate that are one of the primary drivers of currencies, so there is no escaping the significance of a US central bank beginning a tightening cycle for the first time in over 10 years. New skills will to have be learnt by young traders and analysts alike to deal with this (or dust off old ones for more seasoned ones). The dollar's correlation with data surprises will increase as the currency becomes more sensitive to the pricing in interest rate markets.

I don't think people are even agreed on what caused the last one. Sub-prime mortgages in the US are naturally the prime candidate but there were plenty of other over-valued assets around at the same time (e.g. Eurozone peripheral sovereign debt, leveraged loans, etc.). History shows that one of the key causes of crisis in financial markets is investors positioned in a particular direction, less caring of value and then rushing for the exits at the same time that buyers are liquidity constrained. In other words, the bursting of an asset bubble. It's hugely hard to break this cycle, even though many central bankers have new tools at their disposal to attempt to do so. Bottom line, I don't know!

My role has and will be shifting further, away from markets and more to the business side. Naturally, I'll still have an eye on what is going on in FX and elsewhere and commenting upon it from time to time, but my bigger focus will be on expanding our business during 2016.

In terms of people, I have to say our CEO, Charalambos Psimolophitis. The underlying trends that will drive the industry in 2016 are technology, greater more openness and transparency, together with solutions that make FX more accessible as an asset class. We've made considerable in-roads in all these areas and I think any firms that can do so, either collectively or look to crack just one, will make their mark.

I don't make any, as they are inevitably broken. I tend to develop through the year and tackle one thing at a time, which tends to lead to better results. Oh, but I do promise to read FXStreet a lot more!