Why is this when, as we saw, there was an inverse relationship between interest return and currency performance in 2013? It's probably because the market is expecting continued normalization in the global economy.
Putting the pieces together
One reason why low interest-rate currencies gained so much in 2013 was investors were looking for safe havens. Denmark, with a current account surplus of around 6 percent of gross domestic product (GDP) and only a small budget deficit of 1.7 percent of GDP, seems pretty safe. Switzerland, with a current account surplus of 12.7 percent of GDP and a balanced budget, seems even safer.
But apparently people have become more confident about the global economy and are now less concerned about safety. This is probably because so many things we've worried about haven't come to pass. The Eurozone hasn't collapsed yet, the U.S. government didn't default, quantitative easing didn't cause hyperinflation, the Federal Reserve's exit from quantitative easing didn't cause the emerging markets to implode…many of the major problems that were facing the markets at the beginning of 2013 seem to be under control now.
In that case, people are going to start looking for some return on their money. They're likely to put on carry trades funded with the low-yielding currencies of countries whose central banks are unlikely to change monetary policy any time soon and invest in higher-yielding countries where the central banks are at least going to keep rates stable and may raise them at some point.
Now, I'm not saying that I agree with all these forecasts. On the contrary, I disagree with many of them. But that's where the opportunities lie for a fundamental analyst. We have to examine where our forecasts differ from other people's forecasts and ask two questions: What possibilities might we be missing and what might the market be missing? And secondly, do we have enough confidence in our view to back it with money? That's the way fundamental investors work.
The author is the Head of Global FX Strategy at IronFX, an on-line trading firm specializing in Forex, CFDs on U.S. and U.K. stocks, and commodities. He was previously Head of the Forex Committee at Deutsche Bank Private Wealth Management.