2016 was a curveball for the currency market to say the least, with the shock results of the EU referendum and US elections upsetting the status quo and causing dramatic swings in exchange rates.
But with 2016 now well and truly behind us, we take a look at what major factors are likely to shape the currency market over the next twelve months.
The first major event likely to impact the global currency market is the swearing in of Donald Trump as the 45th President of the United States, with less than a month to go before the President Elect’s inauguration day on January 20th.
The controversial victory of Donald Trump in November’s presidential elections caused waves across the foreign exchange market. The US Dollar shot up in value, despite a win for the economic wildcard having been widely predicted to have a negative impact on the ‘Greenback’ in the run up to the election, with Trump’s plans to increase infrastructure spending and the deregulation of banks cited as the reasons for the rise.
Investors are likely to watch Trump’s moves like a hawk following his inauguration as they wait to see to what extent the former businessman will stick to promises made during his election campaign or if the responsibilities of office will temper some of his more outlandish policy plans.
Two of the key issues that are likely to sway exchange rates are Trump’s plans to increase infrastructure spending and his desire to tear up a number of free trade agreements as he seeks to protect US industries.
Investors are optimistic that Trump’s plan to spend $1 trillion on infrastructure projects over the next 10 years will help to stimulate the US economy, although he may run into trouble passing it through congress if it is likely to cause the national debt to balloon further.
Economists are more worried about the President Elect’s plans to tear up a number of pre-existing free trade agreements, especially those that involve China, as he blames cheap foreign imports for the demise of US industry.
Then there is, of course, Mr Trump’s outspoken personality which may cause him to butt heads with other world leaders, or lead to some late night twitter rants, with a recent tweet from Trump knocking $3.5bn off Lockheed Martin’s market value as he complained about the price of replacing Airforce One.
Next up is big bad ‘Brexit’ which has been hanging over the Pound since the EU referendum back in June. The formal exit process is expected to begin in earnest by the end of March when Prime Minister Theresa May triggers Article 50 of the Lisbon Treaty, kicking off up to two years of negotiations.
Investor attitude towards the uncertainty inspired by ‘Brexit’ is largely negative and, subsequently, we may see the Pound plummet in the run up to Britain’s exit from the European Union. However, while some experts expect the UK’s economy to be adversely affected by the split and the uncertainty that surrounds the government’s plans for negotiations, if it appears that the UK is heading for a ‘soft Brexit’ (and retaining access to the single market) the Pound may be able to hold its own.
May is expected to disclose her plans for ‘Brexit’ some time before March, but whether or not Parliament will have a say in the activation of Article 50 is yet to be decided. The Supreme Court debated on whether the Government can activate the essential legislation without the ratification of Parliament in December but hasn’t delivered its ruling.
Many traders currently believe that the Government is headed towards a ‘hard Brexit’ which will see the UK gain strong immigration controls but in exchange lose access to the single market. EU officials have repeatedly stated that there can be no access to the single market without the acceptance of freedom of movement.
Loss of access to the single market has been behind investors souring on the Pound as they fear that British businesses would be crippled by any tariffs introduced on goods sent to the continent, and London could lose its status as the financial centre of Europe.
This is why a vote in parliament is seen as crucial for those championing a ‘soft Brexit’ as it is believed that opposition MPs would greatly oppose any deal that would cause the UK to lose access to the single market.
‘Brexit’ speculation is also likely to drag on a number of economic variables for the foreseeable future, with metrics like inflation and consumer spending likely to be heavily impacted by the falling value of Sterling.
Likewise, the Bank of England’s (BoE) policies are going to be largely driven by the direction of ‘Brexit’ negotiations and their impact on the Pound. Governor Mark Carney previously announced that the interest rate will remain at a record low of 0.25% until Britain’s economic outlook becomes clearer, but recent data actually supports the case for a rate hike.
If the negotiations go south we can expect losses in both the Pound and Euro, but if investors are cheered by the direction the Government is taking Sterling may be able to recoup some of its 2016 losses.
Adding to the global political and economic certainty will be a number of elections across Europe thanks to the threat of rising populism, sparked by tensions surrounding the recent influx of refugees and concerns of another Eurozone crisis.
The first of these events will be the Dutch elections on March 15th where far-right populist Geert Wilders will be challenging Prime Minister Mark Rutte’s Liberal Party for control of Parliament. Observers currently predict that Wilder’s Freedom Party may even take 28 seats, just ahead of Rutte who is expected to take 27.
One of Wilders key objectives is to hold a referendum on Holland leaving the EU, but it is unclear how likely that is to occur. Even if Wilders is able to form a government, most other political parties have sworn not to work with him.
The next major election will be the French Presidential Election, beginning with the first round in April before a runoff in May.
Investors are concerned about a potential victory for Marine le Pen and her right-wing National Front party after they took 27% of the vote in 2015’s local elections. Markets fear that Le Pen will also receive a bump in popularity thank to the recent rise of European populism as she runs her campaign on leaving the EU and curbing immigration.
Most analysts predict that Le Pen will fall short of the presidency in the second round and lose out to a more traditional candidate, although many will be quick to remember similar forecasts ahead of Trump’s election and ‘Brexit’.
While not currently scheduled until 2018, there are concerns that early elections could be called in Italy some time in 2017 after the previous PM Matteo Renzi resigned in early December, leaving a newly formed government to face the challenge of bailing out Italy’s third largest bank, Monte dei Paschi, and reforming the country’s banking sector.
There are concerns that should an early election be called in 2017, the door could be open for Italy’s Eurosceptic Five Star Movement to gain power as the anti-establishment party enjoys widespread support following the rise of populism in 2016.
Finally, and arguably most importantly, are the German parliamentary elections in September, in which Angela Merkel will be seeking to run for a fourth term as German chancellor.
While Merkel and her Christian Democratic Union have remained hugely popular over her long and successful career as Europe’s most powerful leader, they have both been dented by Merkel’s open door refugee policy, which has caused German voters to become increasingly disillusioned with the CDU amid growing political tensions, especially following the terrorist attack in Berlin in December.
However, with no credible populist threats to Merkel’s position, the election is likely to see a runoff between the CDU and the rival Social Democrat Party and she could find her position weaken even if she wins.
After recently voting to raise US interest rates for only the second time in over a decade, all eyes are on the Federal Reserve after the central bank made the hawkish prediction that there could be up to three rate hikes in 2017.
At a time when most central banks are pursuing a dovish agenda towards interest rates, the bullish forecast of multiple rate hikes is likely to have quite an impact on the global currency market as investors flock to the US Dollar seeking to profit.
It is worth bearing in mind that the Fed made similar proclamations at the end of 2015 as well, forecasting multiple rate hikes that eventually became a single hike at the end of 2016. However, what makes markets more hopeful this time round is that the prediction follows an exceptionally strong unemployment report.
Fed Chair Janet Yellen has consistently pointed to a strong job market as being the key to future rate hikes, and now with US unemployment at an almost decade low and speculation that Trump’s stimulus plans could create thousands more jobs over the next few years, there is substantial support for more rate hikes in 2017.
Meanwhile, the Bank of England and European Central Bank’s decisions to hold interest rates at record lows are likely to drag on their respective currencies, especially in Europe where the ECB’s zero rate policy has been blamed for causing the recent banking crisis as banks struggle to stay profitable, making the US Dollar even more attractive to investors.
With the strength of the US Dollar causing markets to become increasingly risk adverse, traders in high-yield currencies like the Australian Dollar will be eying the Chinese economy this year as they speculate over whether the recent uptick in output in the world’s second largest economy will continue into 2017 and bring an end to years of anaemic growth.
The continued growth of the Chinese economy would likely prove beneficial to commodity-based and emerging-market economies, not only increasing demand for raw materials like iron ore but also helping improve investor risk appetite.
However, if China’s economy underperforms (as some economists have forecast) then it could have a major impact on the Asia-Pacific region, where many economies are closely tied to Chinese production levels. Commodity prices are also likely to plummet, which would dent demand for commodity-correlated assets.
The Trump issue comes into play here too, raising questions over what impact his tearing up of free trade agreements in Asia could have on the region. Will China flounder without easy access to the US market, or will it reap the benefits of a more open trade relationship with its nearer neighbours as they search for new trade opportunities?
As one final bonus, we have the oil production cuts agreed upon by the Organization of the Petroleum Exporting Countries (OPEC) and other non-OPEC countries, such as Russia, late last year.
The hope is that by curbing production over the first six months of 2017 there will be a notable impact on the current global surplus of the commodity, causing prices to rise – something that is likely to benefit currencies of major oil producing countries like Canada.
However there are serious doubts over the extent of the impact on the surplus after just six months, as well as concerns that the whole agreement could fall apart if some members do not comply with the cuts – as has happened in the past.
Whatever happens in 2017, staying on top of the latest developments is crucial if you want to secure a good exchange rate and make the most of your currency transfers.
If you need to move money abroad in the future you may be interested in finding out more about your currency transfer options.
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