Posted January 11, 2017 Ashley Chadwick
We take a look at recent moves in the foreign exchange market and a glimpse to what we could expect to see in 2017.
Unsurprisingly it has been Sterling amongst the major currencies that has been the underperformer in recent times. The historic decision to leave the EU has seen the Pound weaken 16% in the past 7 months. It is now trading back at the 1.21 level, just 20 pips above 30 year lows, barring the flash crash of October. The Pound is only 9% down against the Euro in that time, trading around 1.15 right now, recovering from lows of 1.10 in October. Comments this weekend by Prime Minister May, giving a strong indication that Britain may leave the single market sent Sterling lower. It cannot be forgotten that diverging monetary policy has also seen selling in the Pound. In response to Brexit, the Bank of England lowered interest rates and increased QE, whilst the FOMC hiked for the second time and 2-3 more hikes are expected in 2017.
A lot of volatility can be expected in the value of the Pound once article 50 is triggered and negotiations begin. For Sterling to recover its recent losses, negotiations would have to be seen as progressing well and there would be strong indications that Britain will remain in the single market, as part of a ‘soft Brexit’. Given the rhetoric from EU leaders, such as Merkel, the desire to control borders and limit immigration may make a ‘hard Brexit’ inevitable.
It is monetary policy divergence that explains the strength in the dollar against the euro recently. It is trading near 14 year lows, below 1.05, having been around 1.14, 8 months previously, a fall of nearly 8%. Mario Draghi, President of the European Central Bank, announced an extension to their QE program. Although, discussion of tapering of their QE program may be providing some support to the Euro, as it seems likely to begin in 2017. Should tapering occur sooner, faster, or in larger size than people expect there would be a recovery in the Euro. However, if there would be need for an expansion of QE or tapering does not occur, then the touted parity level would be a target.
Looking to the other side of America, Japan had seen the Yen strengthen against the dollar. It started 2016 at 120, before it started testing the key 100 level. However, no clear break of 100 was made, it only closed below that level once. After the US election, the Yen gave back most of the gains it had made in 2016, ending 2016 back up around 117. Prime Minister Abe and his policies are a key driver of the Yen, as more stimulus is instigated and announced, as seems likely, the Yen could continue to drift back from the 100 level.
The election of President Elect Trump caused shockwaves amongst all the financial markets, none more so than the Mexican Peso. Given all the comments and policies about Mexico from Trump during the campaign, it was no surprise that the Peso lost value upon his election. It moved from 18.6 Pesos to the dollar and is now close to 22, an 18% fall in the value of the Peso. Since the election, talk of the wall Trump promised has dropped off, so it is possible, that Trump will have to temper his views, which could see the Peso recover some value. However, should Trump stick to his promises about Mexico, the Peso could continue to weaken through 2017.
Meanwhile, the Aussie and Canadian dollars have both been relatively stable against the dollar, with no major moves of late. Just a general weakening against the US dollar towards the end of 2016, as has been the case for most currencies.
For most of 2016, China allowed the Renminbi to weaken against the dollar. A dollar could get you 6.45 Yuan at its lows of 2016, but finished the year closing in on 7. There was a lot of vlolatility in the first week of 2017, much as there was the first week of 2016, that saw the Renminbi strengthen 1.7%. It underwent its biggest ever two day gain, on strong service data and shrinking offshore liquidity. Attempting to predict China’s currency policies going forward is always risky, and we are set to have increasing unpredictability from US policies, so forecasting the path for the pair is tricky.
Naturally there are a lot of unknowns surrounding the new Presidency and Trump’s policies are likely to be a major driver for the forex markets in the coming year. Similarly, Brexit hasn’t even begun yet, once article 50 is triggered negotiations will last for up to two years, although are likely to dominate the European landscape for years to come. Important elections in France in early 2017 and Germany later on, will be risk events, particularly if Le Penn’s National Front takes power, or Merkel loses hers.