2013 Review: The Year of the Taper

The big focus for the forex markets in 2013 was on whether or not the US Federal Reserve was going to start tapering its $85 billion a month bond purchases. It hinted at its meeting in May that it wanted to start reining in its quantitative easing programme unleashing considerable volatility.

After some poor communications, volatility and speculation the Fed finally announced in December that it would start tapering at a rate of $10 billion a month. In retrospect it communicated the event well as the markets took it as good news – a sign that conditions are returning to normal.

Nonetheless, the run up to the taper saw many emerging market currencies take a hit particularly in countries with large current account deficits, which had become dependent on the Fed's largess.

The Euro – a surprise winner

Surprisingly, the EUR turned out to be one of the best performing currencies in 2013. On Dec 23 the EUR was 103.79 versus a basket of 21 currencies, compared with 99.22 the same time a year ago. And 2013 didn't start particularly well for the single currency.

Amid the usual concerns over the state of the peripheral Eurozone economies one them, Cyprus, had to be bailed out to the tune of EUR 10 billion in March. The political furore which accompanied the whole episode reignited concerns over contagion and even a break-up of the EUR. The Eurozone pulled through and as the year wore on it appeared that the leading peripheral Eurozone economies were beginning to stabilise and even show signs of growth.

Meanwhile, German chancellor Angela Merkel, considered by many to be the Eurozone's real leader, won a decisive election victory.  Also, the Eurozone managed to make some slow progress on a bail-out mechanism for failing banks. 

USD shrugs of political paralysis

USD was also a star performing currency despite a show of very divided politics in the US, which led to a government shut-down in October 1-16. Democrats and Republicans were eventually able to come to a longer-term agreement over the US budget heading off another damaging shut down in the new year. Against a basket of the major currencies USD was 76.33 versus 73.12 the same time a year ago. 

But while the politicians were busy arguing the US economy was recovering as was the key real estate market. This enabled the Fed to announce the start of its tapering – a very bullish event for the USD. Also, Janet Yellen was nominated to takeover at the Fed from Ben Bernanke on January 31, 2014. It will be her job to see through the end of quantitative easing, which is unlikely to be a smooth process.

Abenomics hammers JPY

Whilst the Fed was shifting to taper mode the Bank of Japan was just getting started in a bid to banish deflation and restore growth to Japan. The policy became known as Abenomics with the BoJ aiming to double the country's money supply. JPY was also a target for Japanese officials who desired a rate of UJSD/JPY 100. They got their wish. By late December it was flirting with levels of 104 and looks set for further weakness.

UK recovery gather pace

The UK economy in 2013 looked its best in five years. With an eye on elections in May 2015 the UK government initiated a series policies to stimulate the all important real estate market and eased up a bit on its austerity measures. 

Towards the end of 2013 the economy was growing at an annualised rate of 1.9% and real estate prices were rising strongly. This led to the Bank of England deciding not to extend its quantitative easing programme beyond GBP 375 billion.  In June, former Canadian central bank governor Mark Carney took over at the Bank of England – the first foreigner to do so.

Cable is looking to finish slightly higher than this time last year following a rocky performance between March and August.

By Justin Pugsley, Markets Analyst MahiFX

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