Sunday, 9 February 2014

2014- A quick summary



 
Over the last few weeks I’ve been completing my currency forecasts for a few of the emerging market currencies that I skipped in my work last year. As it turned out this was a topical subject. And in those currencies I had originally considered, (Rupee, Rupiah, Real), there was a great deal  more activity for a week or two than I had forecast.

So does this mean that my forecasts were wrong? I would say, unequivocally, no!

In my defence, I always remind my readers that I am submitting rolling 3 month forecasts that merely highlight broader trends and very significant events, they doesn’t throw up all the daily and weekly animal spirits of the markets. For that sort of detail, I am afraid, dear readers, you must pay.

And, having gone back to the detailed source material, I can confirm that every single one of the emerging market currencies was affected by just one factor in late January early February.

And it isn’t over yet either. Furthermore, there are enough factors combining in 2014 to suggest that we haven’t seen anything yet!

Many of the charts, and particularly the currency charts are highlighting the period around April. Obviously some of the factors that will be important then have already been activated in January, and the stories will continue to unfold over the next two months. But there will be renewed vigour to them by April.

Yet, before you all rush off and sell the same old, same old, currencies again, I feel a few remarks are in order. 

What I have found as I ploughed my way through each currency forecast, and especially analysing the last three ( Rand, Rouble and Lira) in quick succession, is that lumping all these countries together is a big mistake. Yes, it allows bored senior investment bankers to come up with neat acronyms and, yes, it is pretty much the simplistic approach you might expect from a load of junior traders who have probably not been further than Ibiza or Atlantic City, but it fails completely to acknowledge that all these countries are  vastly different.

In layman’s terms, in order to successfully forecast one must have a thorough understanding of the history and the culture of a country.  Yes, current politics is useful, and so are a grasp of recent events and economics, but nothing beats that deep historical and cultural context.  And I’d even go as far as to say that you can’t really understand a country until you’ve considered its geography ( climate, geology and location); without those there would be no history and culture.

But I digress. What I was trying to say is that each country and currency is different and when making investment decisions should be treated as such.

My analysis has revealed striking differences in the conditions of, and prognoses for, each country and thus each currency

And it looks like the broader investment community might be beginning to be a bit more discriminating, as the currency valuation pathways for March to May look as if they will vary considerably between countries.  

Furthermore, I caution against assuming that what happens over these few months is establishing a trend for the latter part of 2014 and 2015. Some countries are going to settle down, but others are going to be more problematic.

I suggest a review of my individual forecasts for the details.

Dates to watch, the whole period into May is tricky, though the emphasis will shift from region to region as the weeks progress. Particularly key   dates are :

the first few days of March

18th-34 March

31 March

14-15th April

21st- 23rd April

27th April

 

And the order of concern for currencies in the coming 4 months

Bolivar
Rand
Argentinean Peso
Turkish Lira
Rupiah
Rupee

Dollar (i)
Euro    (i)
Sterling (i)
Yen
Renminbi (ii)

Rouble
Mexican  Peso
Real

 (i) not so much difference in effect in 2014 but the dollar problems in Feb and March will probably precede the Euro ones in April and Sterling will get caught briefly by the latter)
(ii) The nature of the Renminbi issues is quite different from that of the other main currencies and may actually represent significant appreciation.

Politically there are a host of elections in 2014, but they are mostly later after the currency issues calm down, so the likely outcomes of these are:

South Africa – Change of leadership
India – Change

Indonesia – probably no change
Turkey – hard to call – could be deception surrounding the vote. Possibly no change

Brazil – quite a lot of challenge in run up but probably no change in the end.

 

 

 

 

 

 

Friday, 7 February 2014

Russian Rouble 2014-16

 
As usual we're aligned with the rest of the universe. Not only have I been working on these currencies over the last few weeks, but I am not posting this one as the Russian Olympics open.
 
 I've diverged briefly from my art illustrations for these 3 posts today. I've instead decided to remind the world that these 'emerging markets' contain elements of extreme sophistication and wealth. Although admitted this one is a bit tongue in cheek!
 
2014 
In keeping with the other emerging market currencies the Rouble hada difficult January. With a small declines until around 22nd Jan it then lost 5% but this one stabilised quite quickly.
February and March seem to be much calmer months.
 There is a little more background imbalance in April and May. However there does not seem to be a return to January conditions in this case.
There is a shift in emphasis from June onwards. But there is still the continued longer term background  weakness.
However this seems to be more than offset over the summer months by unexpected optimism and support, presumably, from the economy.  
Later there may be interest rate changes in August and a burst of buying of the currency leading to some appreciation in September
October and November are more mixed, although the mix of sentiment is not likely to create much of a trend until late November when there could be a decline in value, or at least a more muted approach that restricts volumes
December, sees this phase pass but there is still some restriction in the air despite a generally more secure condition.
 2015
2015 looks to be a positive year for the Rouble.
The mood is positive, right from the beginning of January.  However it is tempered by restrictions and perhaps rising rates.
Still, the currency should end the first quarter higher than it started.
There is a new situation that comes into the mix by April, which will remain a theme over the next two years. It is possible this relates to inflation of asset values or natural resources.
Whatever the cause it seems to carry the rouble forward in april and much of May.
June and July look like being interesting. With possible inflationary  background leading to the government having to take some action. Perhaps to keep over buying of the currency in check.
August is another positive month, although once again rates might be in the spotlight.
September to November don’t really see a let up in any of the themes.
There is certainly a lot happening. Long term structural concerns remain but easily take a backseat to the inflationary asset values. Restrictions may be imposed but by November they are likely to be overridden by more positive spirits.
December, however, sees a more measured situation, perhaps due to conditions in or even agreements with other countries.
While the  rouble is still attractive this will prevent too much happening value wise.
 2016
The issue surrounding asset and resource valuations continues into 2016, with more inflationary pressures.
However in January and February these are more than offset by some restrictive influences which might create some negative sentiment.
March and April represent tricky times, when there is a continued attempt to balance conflicting issues. The currency will probably go nowhere.
May and June are more interesting. The inflationary issues reach a peak and combined with the effect of the earlier agreements creates a sense of complete inertia with little trade 
It will take some dramatic events to get this situation moving again.
But by July there is a return to focus on asset and resource values.
There is concern about the imbalances being created and there is instability in the currency arrangements that have been made.
Nevertheless, august sees another burst of enthusiasm
September and October see no new themes emerging, merely a continuation of the existing ones in a lower key. So there is unlikely to be much change in value nor, indeed, unusual levels of trade in the currency now
There is a development towards the end of the year, though, when there may be further attempts to bring a sense of reality back to the situation.
Chart
3 Jan 1897 o.s. St Petersberg Noon. A gold standard
 
 
 
 
 

Turkish Lira 2014-16

 

2014
January and February are characterised by unexpected dramas.
Jan – ok till 22nd then 13% decline, almost all reversed a week later ( rate rise), but then settled at about 6% decline for month
The instability remains throughout the period.
 And continues on into March and April as total uncertainty begins to reign. Indeed if anything the situation becomes even more unstable throughout these two months.
Although there may be fluctuations in value in both directions, the overall mood is likely to be negative again.
I wouldn’t rule out another interest rate change.
Although the themes continue into May and June, there is less of a feeling of direct pressure. Now it is more likely that volatility is larger but with less downward pressure. Indeed there might be a rapid reversal in June.
It is more of the same in July and August. But again with less clear direction. Although there is no sign of a lifting of the uncertainty.
Late August though sees a slight change in sentiment
September and October suggest  less uncertainty ( at least temporarily) and more direction to trade.
There is still volatility, but there is, on balance, a more positive mood now and this might lead to an up-tick in value, although it is unlikely to be large in comparison to the broader trend.
November and December, however, see some relief from the pressures, a more positive mood and perhaps some recovery in value for the Lira.
 2015
It is a brief respite though as 2015 begins with many of the themes of 2014 continuing. There is still uncertainty, still volatility and still pressure on values.
However the situation is not as bad as before and there are signs that the balance might even be positive by the end of February. There is definite support at this level.
March and April see things all over the place again though.
But May to August, while not signifying a turnaround in sentiment. At least sees enough positive momentum to create a rise in value and indeed some volume of trade in that direction.
September and October see a return to earlier conditions, and inflationary concerns. Will lead once again to volatility.
Fortunately it settles down towards the latter part of these two months as a new environment is being created.
The new situation starts to take its form in November and December but there is still, inevitably, some uncertainty surrounding how it will play out.
This will briefly lead to more of the old instability and volatility.
2016
 
 While 2016 cannot be considered a quiet year by long term standards, it is an improvement.
January and February sees some stabilising influence brought into play to offset the dramas.
March and April sees the country adjusting to the new conditions, perhaps with some difficulties but without the same levels of uncertainty and volatility that have been seen in the last 3 years.
May and June are tricky and perhaps somewhat more volatile. There is less in the way of stabilising influences. However there is a continued optimism that the situation is beginning to settle down.
July is likely to see more of the same themes but August sees the currency finally starting to emerge from the tunnel.
Indeed August is a very positive month for the currency. Although the difficulties are fresh in minds and will prevent any rapid rises.
September and October are more mixed but again much more positive.
A  much better position is reached.
The final stage in the stabilising process that started a year ago falls into place in November and December. Whilst there are still long term issues to be resolved and whilst there is a mix of positive and negative views the good thing is the reduction in volatility and uncertainty.
There may be rate changes and other minor policy adjustments that affect value but the overall situation is much better now.
Chart
Although it is possible to identify dates for the currency in the 19th century, due to the late calendar change I wasn't able to identify whether these dates were old or new calendar. So I have set my chart for the formation of the Turkish Bank on 3 OCT 1931 at 00.00 local time 
Picture
Not an art work, just a photo of one of my favourite hotels in the word
 
 

Rand 2014-16

 

2014
The Rand has been in long term decline, unlike some of the other emerging market currencies which have been considered attractive at various times in the last few years. So any changes should be seen in this light.
Certainly conditions for January were not good. The currency was doing relatively OK till Jan 22 then suffered almost a 10% decline. It starts to recover early February but there is no reason to expect any big improvement.
 March and April see continued structural weakness and another dramatic change in value.
The long term effects remain in place throughout the rest of the year, but the short term picture changes a little in May and June.
 There is brief support for the currency and then another volatile phase, although perhaps with less tendency to a downward trend
July and August though  see the conditions for decline back in place.
So more volatility, followed by lessening of some restrictions  and then some over-reaction are likely.
September and October sadly seem to see a return to the more severe conditions of the start of the year.
But there is evidence of a turning point in sentiment now too.
Although all the structural conditions remain in place in the last two months there is enough support ( interest rate rises perhaps) to prevent any further changes in value now.
 
2015
 
By 2015, although the structural weaknesses remain, the volatility seems to be reduced.
There is a sense of consolidation goes on as there is less speculative trade and more support for the currency in January and February.
 However, there is a lot happening in terms of policy and there may be a series of interest rate and other actions in March and April.
Events, perhaps externally, may also create volatile conditions again briefly.
By May, the environment moves into a medium term shift. There is some confusion about what is happening and some surprising policy responses from the government which actually seem to favour the Rand at this time. Although there is so much in the air that it  is difficult to see where things are heading long term now.
July is a quiet month with paucity of trade perhaps the only issue.
August and September look generally positive for the currency although once again there is a lot of background activity that might be of concern.
October and November are more mixed as the conditions of the previous months together with new policies and directions start to merge.
December is a relatively calm month as matters settle down a bit more.
 2016
January and February 2016, are also mixed although now there are less long term structural matters to contend with a more adjustment to new policy.
March and April see some challenges and some surprises but in the main there is little change in the value of the currency.
May is particularly good, with just enough energy to keep things ticking along but without any direct challenges.
June and July suffer a little from the need to adjust further to the new environment but on balance the conditions are positive for the Rand.
August sees another change in the environment and a positive trend throughout this month and September.
Even to extent that there is some over exuberance in late September.
The last three months see things being set up for the future.
October and November are both positive with a key shift occurring in sentiment.
December is a key month as everything comes together to consolidate the position of the currency in a much better position.
 Chart
14 Feb 1961 Pretoria