The 3 Best Forex Trades Now

Top 3 Forex Picks For 2014

In this article I dissect the forex markets and present my top 3 forex trades for 2014.

Thinking back to January of last year, there were many predictions made and with varying success. Some analysts predicted the US dollar in freefall, others that the Aussie would climb, while a small few predicted a full blown currency crisis for the euro.

In the end, the year's biggest move belonged to the Japanese yen, which fell over 20% as a result of 'Abenomics' - the term given to the renewed period of monetary easing by the Bank of Japan.

Moving into 2014, it is impossible to know exactly where and when the big trends will occur but by looking at some basic market fundamentals we should be able to get a better understanding of where markets will head.

Forex fundamentals

In order to predict the likely direction of the major currencies over the coming year I have created a ratings table, formed from a list of economic indicators whose currencies can be freely traded.

I am looking at four different but interconnected factors here; economic output, the likely direction of interest rates, inflation and the balance of trade.
These factors alone should give a good idea of where currencies could go as the year progresses.

Forex economic ratings table


NB Last quarter figures

Looking at the table, the big story from what I can see is the acceleration of US growth and that should lead to more strength for the US dollar next year. With this in mind, my top 3 forex picks for 2014 are as follows:

EUR/USD - Short

The unprecedented amount of monetary easing instigated by the Federal Reserve may one day see surging inflation and cause the US dollar to lose some of it's shine but I do not feel that 2014 will be that year. Taking a look at the data, quarter on quarter growth of 4.10% shows the US is clearly pushing ahead of its main trading partners, particularly in Europe where growth last quarter was a meagre 0.10%.

While US inflation and unemployment remain steady at 1.20% and 7% respectively, inflation in Europe is just 0.90% and the jobless rate is 12.10%. What this data shows is that the European Central Bank (ECB) need to get their act together if they are to get growth in the Eurozone moving. With inflation at 0.90%, there is clearly plenty of room for the ECB to initiate some more aggressive policies in 2014 in order to get GDP going and unemployment falling.

In comparison, the US has already begun to scale back its monthly asset purchases and the next step, once inflation starts to rise more rapidly, will be to raise rates.

With this in mind, the clear bias is for strength in the dollar and weakness for the euro.

Furthermore, with some European nations still on the brink, there is still the possibility of a sovereign default in Europe and that would further hurt the euro's chances.

USD/CAD - Long

While the eurozone suffers from weak economic growth and a jobless rate over 12%, Canada faces the problem of having an already strong currency while a poor performance in commodity markets has hampered the country's economic progress.

Unlike the ECB, however, the Reserve Bank of Canada still have some bullets left with interest rates hovering at 1%.

Inflation, at 0.9%, is not a real problem so a more dovish approach to monetary policy from the Bank of Canada would see a boost for GDP and see the Canadian dollar come under real pressure. Canada's current account deficit (higher than the US's at -3.7) is also a negative and another reason why USD/CAD is a good bet for 2014.

AUD/NZD - Long

Although Governor of the Reserve Bank of Australia, Glenn Stevens, has remained vehemently dovish on the Australian dollar, the fact is, that with inflation already over 2%, the RBA have very little room to cut rates again.

Stevens comments have done their job though and the Aussie was one of the big fallers of 2013. Against the Kiwi, the pair now trades at a 5 year low which makes it extremely oversold on a historical and technical basis.

The New Zealand economy meanwhile has shown some strength of late, and a booming housing market has led analysts to price in a March rate rise by the RBNZ.
However, this is surely too soon considering growth has room to improve, inflation is still manageable and NZ's current account deficit lingers at -5%.

Once markets realise this miscalculation, the chance of upcoming rate rises will likely be pushed out to 2015 and this should cause AUD/NZD to retrace a chunk of its 2013 drop.