US Dollar Outlook for Q4
US Dollar Outlook for
Q4 and an
Important Lesson for Traders to Keep in Mind - by Alpesh B. Patel.
The currency markets globally have been hit
by several key developments that have changed investors' outlooks for
the coming months. The most important asset to keep an eye on is the
United States Dollar, the most heavily traded instrument as it is a
component in all major currency pairs and acts as the global depositary
currency. What will Dollar do in the months to come and how will it
affect the rest of the market? Read below to find out.
Fed didn't taper and US shutdown hurt the
US economy, Dollar will struggle
In the United States, the theme that was
discussed all summer long was the awaited 'tapering' of Fed's asset
purchases program. To shed some light into this matter we need to take
a moment and explain what is this 'asset purchases program' that
everyone keeps talking about.
So here it is in layman's terms: to
better assist the US economy to recover from the global financial
crisis it goes through the United States Federal Reserve Bank, the
country's central bank, is buying every month some 85 billion dollars
in financial assets like treasury notes and mortgage-backed securities
from its member banks. This adds liquidity to the system and assists
the banks to offer loans and credit to the everyday person.
 Source:
Pictet & Cie Asset Management
So, during the summer it was believed that
given the developments the US economy showed for some time the Fed was
going to start reducing or 'tapering' this program and analysts thought
that a 5-10 billion dollars reduction was certain. However, the Federal
Reserve Bank surprised everyone that shared this
belief and went ahead
to leave its current level of purchases intact leading the Dollar to a
massive sell-off.
Now, if you add to this disappointment the
very recent stalemate the US government was brought to by the lack of
common ground between Democrats and Republicans on raising the
country's debt ceiling that kept key government sectors close for two
weeks and almost drove the US on defaulting on its debt you will
quickly assess that the Dollar's outlook is not favorable.
 Source:
whitehouse.gov
I believe that the coming months will be a struggle for the American
currency, the economy seems to be recovering but not as fast as the Fed
would like and the recent nomination of Janet Yellen to succeed Ben
Bernanke is an actual signal that this is true. Yellen, the current
vice-chairwoman of the Federal Reserve is a known dove and her
appointment seems a sign that the country's economy will need added
stimulus for some time.
In the coming months we will find out how
much
did the recent shutdown in government sectors hurt the US GDP as
analysts cite that the impact could be meaningful. Standard &
Poor's recently estimated that the impasse could have shaved off as
much as 0,6% from the annual GDP output. Also, keep in mind that the
deal made between Democrats and Republicans over raising the debt
ceiling is not a permanent one. They only agreed on funding the federal
government until January 2014 and it is estimated that the American
economy will now re-hit the debt ceiling in early February. This
translates to a turbulent Q4 for the US currency
as the debate over
this matter could start destabilizing markets weeks in advance and over
the same period time for Fed's tapering decision will be running out.
If the Reserve Bank sees improvements made
in the US economy in the
next couple of months they could move for tapering as soon as late 2013
or early 2014 but with the shutdown impact on GDP not yet fully
assessed and the looming uncertainty over the debt ceiling around the
corner this scenario doesn't seem very likely.
Lesson
to be learned: Never put all your
eggs in one basket. Almost
every analyst and investor in the world had their mouth and money put
on the almost 'certain bet' of the year: Fed tapering purchases and
Dollar rising sharply. However, markets will always hold surprises and
if you bet heavily on such events it will come a time when you'll lose
and probably wipe out a significant part of your portfolio. You need to
treat every trade that you make as a small step towards success and
understand that investing
is not a fast track to wealth but rather a
slow steady climb.
Alpesh B. Patel is the author of How to Win at Spread Betting,
published in July 2013 by Harriman House
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