Last week we ran an essay from trading guru Chris Tate called “The Folly of Predictions.” The general nub of his gist was that you must be stark raving mad to make predictions on the future direction of markets.
It’s a valid point. Last week the Australian Financial Review – and other papers – ran their usual line-up of ‘experts’ predicting what the market would do this year. Most of them were mildly bullish.
It’s just a shame that they couldn’t predict that the Australian market would fall by nearly 5% yesterday. Therefore we don’t hold much hope for their end of 2009 predictions.
But if you’re stark raving mad to predict stock markets, then you must be hatstand-loony to try and predict the direction of currency markets. But that is what ANZ Bank’s currency strategists have done.
And for Australians planning a bit of overseas travel and for importers, if the ANZ’s predictions pan out then it won’t be a pleasant year.
We’ll take a look at the bank’s forecasts shortly. But before we do, let’s take a look at some FX forecasts made at the start of 2008 by CMC Markets’ Ashraf Laidi in the US.
So how did Laidi do? Here’s the rundown:
EUR/USD – Wrong, the correct rate was 1.39
USD/JPY – Wrong, the correct rate was 90
GBP/USD – Wrong, the correct rate was 1.46
USD/CHF – We’ll give him this one. The correct rate was 1.07
USD/CAD – Wrong, the correct rate was 1.22
AUD/USD – Wrong, the correct rate was 0.70
In actual fact, one out of six is pretty good when you think of the possible number of permutations involved. The odds of predicting the exact currency rate on a given day are actually infinite. And therefore virtually impossible.
As for the FX boffins over at ANZ, “Our forecasts are that the Aussie dollar by the end of March will be US63c, and we’ve got US58c in June and US54c by the end of the year.”
That’s a fairly hefty bearish call on the Aussie dollar, considering it is currently trading around US66 cents.
But their senior currency strategist Tony Morriss has his reasons for making the call. He told News Ltd, “Australia’s main two commodities have been iron ore and coal and those prices have turned around quite sharply as conditions in China and other parts of Asia deteriorate.”
“Secondly, the interest-rates support for the Aussie dollar has been stripped away and there is a need to further easing. And there has also been a flow of funds back into perceived safe-haven currencies, mostly the Japanese yen and the US dollar, most surprisingly considering they are at the forefront.”
He finished up by saying, “We are bearish because when you look at our economy and put it in a global context, we are seeing not just a sharp deceleration in activity and dislocation in trade but all our major trading partners are going down sharply.”
The big unknown question is whether the US dollar maintains its status as a safe haven currency, if not, the more interesting exchange rate will become that between the Aussie and the Japanese Yen.
But even trying to predict currency movements at all is notoriously hard. If you think picking a winning stock is hard, think about all the variables involved with picking whether a currency will rise and fall relative to another currency.
Not only do you have to take into account all of the economic factors in the countries’ currency you are trading, but you also need to factor in third-party economies as well.
Based on all the long term currency forecasts we have seen over the years very few – if any – seem to get consistently anywhere near the mark.