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Strongest Currency on Forex in 2020-2025?

February 3, 2020 by

Making long-term forecasts might seem an easy feat — after all, most people would forget about the forecast you had made several years ago and, if you have been wrong, you can just forget about it as well. And, if you have been right, you can make a post about it, celebrating your prowess. This is not how we work at About 5 years ago, I have made a claim about the strongest currency pair for 2015–2020 period (accompanied also by a poll of traders) and it is now time to check the forecast against the reality and to make one for the forthcoming 5 years.

During the previous 5 years, the strongest currency was the Japanese yen (if measured against other majors) with a 21.5% increase, then the Swiss franc with a 12.9% gain, and then the US dollar with its 8.5% gain. The weakest currency was the Great Britain pound (-9.7%), which was a natural consequence of the Brexit referendum results. You can see the chart of the 2015–2020 currency strength changes below:

Changes in Strength of World Currencies - 2015-2020

As you can see, the euro was almost unchanged during the period (~0.01% gain), the Canadian dollar lost 4%, the Aussie shed 8.4% of its value, the Kiwi fell by 7.7%, and the Chinese yuan depreciated by 4.4%.

All these tendencies correlate perfectly with interest rate changes and other fundamental factors related to those countries.

It also means that neither my own bet nor the poll results from 5 years ago were accurate in this case. Both my forecast and the poll’s most popular choice were for the euro to be the strongest of all currencies in 2015–2020. The Japanese yen was only the fourth most-selected vote.

For the strongest currency in 2020–2025, I base my forecast solely on the fundamental analysis and expectations of the global developments during the period. In short, I assume three main determinants during the next 5 years: a minor global financial crisis, reconciliation of trade relationship between US and China (and their other trade partners), low interest rates in major economies.

Caused by the prevalent low interest rates, some form of a short-term financial crisis that would affect nearly all countries is very likely to happen in the next few years. Low rates promote inefficient distribution of investment and enable creation of economic bubbles. A burst of such a bubble at a right (or is it better say wrong?) time has potential to grow into a considerable financial turmoil, affecting the global financial system. This, in turn, will boost the demand for safe haven currencies: US dollar, Swiss franc, and Japanese yen.

Another change that is likely to produce significant impact on the major currencies is a possibility of a complete (or nearly complete) trade reconciliation between US and their trade partners. This is likely to happen in case a Democratic candidate wins 2020 the elections. If implemented, better trade policies would have a positive effect chiefly on Chinese yuan, but also on US dollar, Australian dollar, and New Zealand dollar.

Continuing preference of the major central banks to holding interest rates at very low, sometimes even negative, levels will be a likely consequence of any sort of a financial crisis. This might be a positive factor for currencies that have their reference interest rates already at a technical minimum. Such currencies as euro, Japanese yen, and Swiss franc will benefit from this as the rate difference will be changing in their favor.

All in all, I believe that the top winner out of the nine currencies will be the Swiss franc despite the interventionist currency-weakening policy of the Swiss National Bank. In my opinion, the probability of a crisis happening and low rates season to go on is higher than the probability of global trade recovery during the next 5 years. This means that safe haven currencies will retain their attractiveness. I favor the Swiss franc over the Japanese yen for two reasons:

  • Switzerland’s economy is growing faster than Japan’s — 2.5% vs. 0.3% in 2018. A simple comparison of demographics of the two countries shows why this is the case: 66.5% of Switzerland’s population is aged 15–64, while this share is just 59.7% for Japan.
  • Because the Japanese economy is roughly 7 times larger than the Swiss one, it is much easier for the foreign demand for refuge currency to put upward pressure on the franc than it is on the yen.

So, my choice for the next five years is the Swiss franc. And what’s yours?

Which of the following currencies will appreciate the most between 2020 and 2025?

View Results

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The poll will expire on November 3, 2020, — the date of the US presidential election.

If you want to share some details regarding the strongest major currency for the next 5 years, please reply to this post using the commentary form below.

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