Generally, the FX market is subject to more long-term trends or regimes, where a specific factorhas an impact on virtually all currencies in a particular way. Of course these trends will not explainall exchange rate fluctuations as currencies will also always be subject to other factors specific toeach. Nevertheless, long-term trends are highly influential. Since 2003 three major regimes havegoverned the FX-market: the carry regime (2003-2008), the RORO (Risk On, Risk Off) regime(2008-2012) and the monetary policy expectations regime (2012–). Provided major central banks,particularly the Fed, continue to ease monetary policy the current regime is likely to persist as highcurrency valuations of those predominantly more hawkish have forced all central banks to try tosteer expectations in a dovish direction. If a minor central bank tries to signal a tighter monetarypolicy it would probably have a drastic effect on its currency. We therefore believe the trigger forthe next currency regime will be the Fed ending its monetary policy easing and signals that itintends to tighten its policy. These moves would probably enable smaller central banks to adoptmore hawkish policies without any extreme effects on their currencies. Meanwhile others, includingthe BOJ and ECB, are likely to lag. With FX volatilities having already fallen to levels in line withthose of the previous carry regime, it is not unlikely that widening rate differentials could trigger areturn to a carry regime in 2015, under which both the euro and yen would probably suffer.
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