I have always wondered why banks and other financial institutions make their very highly paid staff issue reasoned, well-argued forecasts as to where a particular exchange rate will be at, say, 12 months in the future.
The main reason for my sense of wonder is why would anyone pay attention? These forecasts, no matter who makes them and no matter how big the name behind them, are almost always wrong, and no better statistically than random guesses. The idea that it is possible to predict Forex rates one year in advance would seem laughable to most Forex traders, as it does to me.
Now it is the turn of UBS Group AG’s $2 trillion wealth-management arm to go out on a limb, as they forecast USD/JPY will by at least 98.00 by this time next year: that would equal a fall of more than 7% from today’s price, and that is a very hefty drop for a major Forex currency pair.
The reason given for the forecast strengthening of the Yen and weakening of the U.S. Dollar is “Trumponomics”, i.e. the economic policies that are going to be pursued by the U.S. under the incoming Trump Administration which takes office in January.
UBS say that analysts are underestimating the protectionist side of Trumponomics and are instead over-emphasizing the reflationary element of tax cuts and increased spending on infrastructure. UBS go on to claim that these fundamental factors are bound to weaken the U.S. Dollar, and that the last thing the Trump administration will want is a strengthening U.S. Dollar.
To be fair to UBS, they are hardly alone in forecasting that the Yen will rise against the U.S. Dollar next year. JP Morgan are forecasting 99.00, which is quite close to UBS.
I have a suggestion to make: if the top analysts at JP Morgan and UBS are forecasting the Yen will rise against the USD over the next year by about 7%, they should have some skin in the game. How about half their salaries at least getting linked to the appreciation of the Yen?
One of the most foolish things any trader can do is make a forecast and trade based on the forecast alone.
If you have your own macroeconomic forecasts, a much better thing to do is to wait until you see the price moving strongly and decisively in the direction of your forecast, and then and only then, take the trade with confidence.
Fundamentals should be used as confirmation. Technical factors should always lead.