2008 Forex Market Predictions

What does 2008 hold for forex traders like you?
See what FOREX.com's trading team thinks.

2008 has opened with several bangs: unexpected rate cuts, a volatile stock market, recession concerns, and a Presidential race that's truly up for grabs. What does it all mean for forex traders? Straight-shooting, unfiltered, and direct from the FOREX.com trading desk, we wanted to share our top 10 market predictions for 2008 with you.

These predictions shouldn't be a substitute for your own research -- but we do hope they'll give you informed food for thought about your forex strategy this year.

• In 2008, the Yen will be king. The year opens with an unwinding of the Japanese Yen Carry Trade due to broad-based risk aversion. Global investors have been borrowing Yen cheaply for years to invest in global markets, which has only added fuel to the speculative fire. We predict spiraling high-risk markets (equities and commodities) force investors to close their positions and repurchase Yen in 2008, pushing the currency higher across the board.
  
  By mid-year, we predict it will take only 140 JPY to purchase a Euro, nearly 20% off the peak levels. Consequently, the rise of the Yen versus the U.S. Greenback may set the currency pair back to its 2005 lows at 101.70.
• The US Federal Reserve may continue to cut interest rates aggressively during the first half of 2008 in reaction to the credit crisis, housing pressure and political pressure. We see US Fed Funds trading at 3%, and then reversing direction during the second half of 2008 as inflation pressures mount and must be addressed. Fed funds could trade at 4.25% in 4Q08.
  
  Meanwhile, we expect the European Central Bank (ECB) will continue to favor an increase on interest rates well into the latter stages of the second quarter. During the summer of 2008 we see this trend reversing dramatically and the dollar regaining some of its previous status as the world's reserve currency.
  
  By year end 2008 we predict the Euro will be trading below US$1.20.
• We see the global credit crisis growing and spilling over from mortgages into credit cards, auto loans, and student loans. The US economy is forced into a recession with the Fed rate cuts providing ineffective in stimulating the overstretched U.S. consumer.
  
  The Bank of England is pushed to cut rates aggressively as a slump in housing prices and over stretched consumer forces their hand. We may see rates dropping to 4.00% and cable (GBP/USD) falling back to 1.7000.
• Contrarian public sentiment barometers suggest that the crowded short-USD trade will soon come to an end. Magazine articles, advertising and pop culture decrying the weak U.S. dollar is proven wrong in 2008. Supermodel Gisele Bündchen has been rumored to request payment in "only Euros please". Music mogul Jay-Z flaunted a fist full of Euros in a video. Lastly, McDonalds placed a dollar menu commercial where a group of office workers' attitudes are changed about the USD based on a double cheeseburger. We feel the US dollar may have an explosive year against all of the majors.
• Heading into the Beijing Olympics, we expect the Yuan will finally be revalued as a signal by the PboC (The People's Bank of China) that China respects the wishes of fellow financial superpowers. The Olympics are an enormous success for the developing nation, as a revered culture showcases itself and its recent economic revolution.
  
  After the Games close, however, we predict the PBoC will turn reluctant again to dampen its exporting power and will remain large buyers of U.S. Treasuries.
• We anticipate sovereign wealth funds will continue their buying binge, especially in the financial services sector. However, we see xenophobes sounding the bell against them, drawing unnerving parallels to pre-bust Japan in the 1980s. Ironically, we predict the capitalist ideas of the funds will prove a stabilizing force in the world, buying distressed assets and giving a boost to the U.S. Dollar.
  
  When the dust settles, we predict these funds' purchases will turn out to be ideal for world markets: the foreign funds own from bargain prices while the institutions utilize the liquidity and leverage the political relationships to make profitable inroads into growing nations.
• Google or Gold? We see the race to $1000 being won by Gold. As "stagflation" becomes the economic catch-phrase of 2008, we see investors flocking back to the precious metal. Reluctant to own Dollars or Euros, global central banks may quietly purchase Gold as the "World's 3rd Currency".
• In the midst of a recession in developed nations and the environmental "Green Movement", we predict crude oil will temporarily declines to $80/barrel. Unfortunately, we don't expect to see any relief for the ordinary consumer in 2008. Oil-refining capacity will probably tighten and crack spreads may rise, keeping gasoline prices at lofty levels.
  
  To the delight of Bank of Canada Governor David Dodge, USD/CAD may increase 10% by summer—but the move will be short-lived. In the second half of '08, we believe Middle East tensions will heighten as the Democratic Party's nominee will struggle against looking "inexperienced" in foreign affairs. We predict crude futures trading back over $100/barrel, confirming the long-term trend higher.
• We foresee Barack Obama becoming the first African-American President of the United States. As a result, the U.S. Dollar retains its euphoric glide higher into year-end, but as uncertainty surrounds this "leader of change" and the Democratic platform of raising taxes on both corporations and individuals, we imagine this stifling US growth prospects. This double whammy may raise the red flag on U.S. equities and the U.S. Greenback into 2009.
• In 1999, tech stocks were red-hot. In 2002, real estate took over. In 2006, commodities were king. We expect the currency market will hit mainstream in 2008. In the growing theme of globalization, where the internet and mobile devices have made the world a much smaller place, interest in the assets of other nations continue to soar. Already the world's largest market in dollar volume, currency trading may double as "Main Street" meets "Wall Street" and the individual investor could become an integral part of the FX world.

The opinions the FOREX.com Forecasts for 2008 are not trade recommendations. In addition, GAIN Capital has not taken trading positions based on the views in the FOREX.com Forecasts for 2008.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.