2019 got off to a dramatic start on January 2nd when the Japanese Yen unexpectedly spiked 3% higher against the US dollar. A ripple effect caused the Australian dollar to plunge to a 10-year low before rebounding. The action took place in a matter of minutes and was dubbed a flash crash. Thin trading volume during the ‘witching hour’ between the close of the New York session and the Tokyo open was pointed to as a cause.
Despite the large swings at the beginning of the year, 2019 has been a year marked by record low levels of volatility. EUR/USD, the most liquid currency pair, has had a narrower trading range than any time since the euro was launched in 1999, with volatility falling to an all-time low in November.
Accommodative central bank policy, US/China trade tensions, and the UK’s struggle over Brexit were the major forces that shaped the forex market in 2019. Among major currencies the US dollar, British pound and the Japanese Yen ended the year higher, while the euro and the Australian dollar weakened.
Shift in Monetary Policy
The year was characterized by monetary policy reversals, with central banks around the globe adopting a more dovish stance. After four rate hikes in 2018, the US Federal Reserve made a U-turn and lowered its benchmark interest rate three times in 2019. The first cut came in July, as trade tensions raised fears of a global economic slowdown. The inverted yield curve in August suggested that a recession may be ahead and the Fed went on to cut rates again in September and October. In December, the Fed held the target range of the federal funds rate steady at 1.5% to 1.75% and signaled that it could continue to maintain rates where they are through 2020. Fed Chair Jerome Powell said he would prefer to let inflation rise and hold above its 2% target before considering future interest rate hikes. New York Fed President John Williams told CNBC that the Fed would need to see a ‘material’ change in economic conditions before making any changes to its monetary policy. At her first rate setting meeting in December, ECB president Christine Lagarde announced plans to keep policy rates unchanged and maintain a bond-buying program.
Unprecedented monetary easing has led to a surge in negative yielding debt. According to Deutsche Bank, $13 trillion in bonds globally had negative yields as of November. Central bank stimulus also played a major role in boosting stocks to a banner year in 2019. Global stock markets gained $17 trillion in value over the course of the year. US stocks are currently in the longest bull market in history.
US/China Trade War
The economic conflict between the world’s two largest economies that began in early 2018 was escalated in May of 2019 when President Trump raised tariffs from 10% to 25% on $200 billion of Chinese goods. China retaliated shortly thereafter by raising tariffs on $60 billion of US goods in June. In August, the central bank of China (PBOC) surprised the market when it allowed the yuan to fall below the symbolic level of 7 to the US dollar, reaching the lowest point since 2008. A weaker yuan makes Chinese exports more competitive and the PBOC move showed that the Chinese were willing to use tools to offset the impact of higher tariffs on Chinese imports. Trade tensions cooled down in December after Washington and Beijing reached an interim agreement that averted new tariffs scheduled to be imposed on December 15th. The ‘phase one’ deal reassured investors but remains modest in scope, with tariffs still remaining on $370 billion out $550 billion worth of goods imported from China.
In the June 2016 referendum, 51.9% voted in favor of the United Kingdom withdrawing from the European Union. Brexit was originally scheduled to take place on March 29th 2019, but the deadline was delayed twice after MPs rejected Prime Minister Theresa May’s Brexit deal. After failing to get her Brexit plans through parliament, Mrs May resigned and was replaced by Boris Johnson. In September GBP/USD fell to its lowest levels since 2016, amid political uncertainty and fears over a ‘no-deal’ Brexit. However, confidence was restored after the Conservative party won a majority of seats in the December UK general election. A Conservative victory was viewed as the most positive outcome by the market, in large part because the result was seen as being the most likely to resolve Brexit uncertainty. Sterling recovered all its losses from earlier in the year and stands to end 2019 higher against its major rivals. On December 20th the Withdrawal Agreement was passed by the House of Commons. If the European Parliament also approves the agreement, the UK will leave the EU on January 31st 2020. The story does not end there though. After this point, the UK enters a transition period until December 31st 2020, during which a trade deal will be negotiated.
The Bottom Line
The year comes to an upbeat end, with stocks posting record highs and the latest trade war and Brexit developments reflecting easing geopolitical risks. However, thorny trade issues must still be resolved between the US and China and tensions heating up will likely lead to a rise in Forex market volatility. With policy rates among major central banks below 2%, less ammunition remains to deal with the threat of a global economic slowdown.