The U.S. Dollar Rises Against Yen, Ruble, and Euro

A variety of factors have caused the U.S. dollar to surge this year, as the dollar index, which measures the dollar against a basket of other foreign currencies, reached a five-and-a-half year peak. The dollar performed especially well against the Japanese yen, the Russian Ruble, and the euro due to slowing global economic growth, differing policies by the Federal Reserve compared to the European Central Bank and Bank of Japan, and the fall in oil prices.

The euro recently fell to two-year lows against the dollar, as recent reports have signaled that the region would only see marginal economic growth in the fourth quarter. Research group Markit reported that the region is only on pace to see 0.1% GDP growth for the fourth quarter, and that there is a strong likelihood that the current near-stagnation would turn to contraction when the new year starts as demand does not show signs of returning. In November, the region’s inflation fell to 0.3% from 0.4% in October, and both figures are well below the European Central Bank’s target of 2%.

Meanwhile, the Japanese yen fell to a seven-year low against the dollar, as its economic growth has slowed and there are concerns about their economy going into a recession. Moody recently cut the sovereign credit ratings of the country due to uncertainty and worries about their economic growth. This is partly because of concerns over the stability of the current government, headed by Mr. Shinzo Abe, exerting downwards pressure on the currency. The Russian economy is also struggling because of a sanctions standoff with the West amid rising tensions over Ukraine. The Russian economy ministry announced that the country would enter into a recession next year, with GDP expected to decrease by 0.8% in 2015, and that the ruble was likely to remain weak without an increase in oil prices.

Crude oil prices have recently been hovering around $70, a steep decline since the beginning of the year. This is largely due to an increase in supply from U.S. and Canadian oil sources, as China’s demand growth has stalled due to capacity constraints. As oil prices fell, OPEC decided not to curb their supply, allowing the market to correct itself. Reasons for this decision, largely influenced by Saudi Arabia, are they are trying to squeeze out fringe oil companies to lessen supply and that Saudi Arabia did not want to lose market share to Iran, who they are competing with for influence in the Middle East. Whatever the reason, the decision hurts the Russian economy, as oil is Russia’s largest export, and it is hard to see a way for the Ruble getting stronger without a recovery from oil. Oil is expected to potentially bottom out at $60, and the rising dollar will make it harder for Russia to import consumer goods.

Source: CNN Money

Magnifying these changes in the currency rates are the differing policies of the central banks. Two influential officials from the Federal Reserve have insisted that the falling prices of oil will only affect their prices in the short run and will ultimately help their government. After tightening their monetary policy recently, it is expected that the U.S. will raise interest rates in 2015, making the dollar even more attractively. At the same time, pressure is growing on the central banks of Japan and Russia, as well as the European Central Bank, to intervene.

The Bank of Japan announced that they will increase stimulus, increasing their purchase of Japanese Government Bonds so that their amount outstanding will be 80 trillion yen, as compared to their usual 30 trillion yen, as well as purchasing ETFs and Japan real estate investment trusts. This stimulus is a reaction to the downward pressure on their currency, causing Japan to be at risk for deflation. This would erode household wealth. The European Central Bank shortly after announced that they too would be purchasing asset-backed securities, and that their stimulus would last for at least two years. These differing policies will be a driving factor for currency markets in the future.

Algorithmic Analysis

I Know First is a financial services firm that utilizes an advanced self-learning algorithm to analyze, model and predict the stock market. The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions.

The signal represents the predicted movement direction or trend, and is not a percentage or specific target price. The signal strength indicates how much the current price deviates from what the system considers an equilibrium or “fair” price. The signal can have a positive (predicted increase) or negative (predicted decline) sign. The heat map is arranged according to the signal strength with strongest up signals at the top, while down signals are at the bottom. The table colors are indicative of the signal. Green corresponds to the positive signal and red indicates a negative signal. A deeper color means a stronger signal and a lighter color equals a weaker signal.

The predictability indicator measures the importance of the signal. The predictability is the historical correlation between the prediction and the actual market movement for that particular asset, which is recalculated daily. Theoretically the predictability ranges from minus one to plus one. The higher this number is the more predictable the particular asset is. If you compare predictability for different time ranges, you’ll find that the longer time ranges have higher predictability. This means that longer-range signals are more important and tend to be more accurate.

In the figure above, one of the currency pairs that was predicted over a three-month time horizon was the U.S. dollar against the ruble. On August 29th, this currency pair had a signal strength of 3.38 and a predictability indicator of 0.13. Since the dollar was listed first, this positive signal strength meant the algorithm was predicting that the dollar would become more valuable. In accordance with the algorithm, the dollar gained 35.99% on the ruble over this time period.