Posted by Oliver Meredew on April 27th, 2017.
2017 is proving to be a busy year by any standards, but what does this mean if you need to transfer currency? Having pored through the figures and the forecasts, we’ll be doing our best to clarify things with a look at the impact of this year’s events on the major currencies.
One word sums up the biggest source of Pound movement this year – ‘Brexit’. The decision to leave the EU last year has caused dramatic Pound volatility since June 23rd and further fluctuations are likely throughout 2017.
With the UK officially on the way out of the European Union, the next event to be aware of is the start of negotiations, due to begin in mid-June at the earliest.
June’s snap election of course complicates matters – the slim possibility of a national leader other than Theresa May talking with EU officials has already unnerved traders this year. A Conservative majority is currently polled as June’s election result, but Theresa May could prove a problematic Brexit leader.
The PM has insisted that a Conservative victory will strengthen her hand in negotiations, but this could mean that she aims for a potentially economically damaging ‘Hard Brexit’. If May does win the election and takes this stance, the Pound may return to trading at its post-referendum lows.
During the lengthy Brexit talks, the Confederation of British Industry (CBI) has estimated for ‘business investment to fall from mid-2017 onwards, before stabilising at the end of 2018’.
The CBI also forecasts that;
‘The post-referendum fall in Sterling is already pushing up import costs for businesses; this will feed through to prices at the till, stoking a faster rise in inflation. The resulting pressure on households’ real incomes will weigh on consumer spending’.
Although rising inflation may make it pricier to purchase within the UK, it doesn’t have a direct impact on Pound exchange rates. It could raise the Pound’s value, however, if surging inflation prompts an increase in consumer price pressures.
The CBI has also predicted the effects of a soft Pound;
‘The weaker Pound should feed through to export growth, and we expect a substantial boost from net trade this year, but this isn’t guaranteed. Higher import prices could take the edge off, given that many UK exports are made up of imported components’.
Ultimately, the CBI has been optimistic about the UK economy in 2017;
‘The UK is well placed to weather all this [uncertainty]. Our economic fundamentals are strong, and Brexit presents both challenges to overcome and opportunities to seize’.
More broadly, the Pound could find some scattered relief if Brexit negotiations seem to be going well – key issues include trade and the free movement of peoples.
On the whole, the sheer volume of Brexit-based uncertainty across the rest of the year means that the Pound’s outlook is neutral/negative – good news if you’re planning to buy Pounds this year as you may get more for your money, but not so great if you need to sell Pounds to buy foreign currency at some point this year.
While the UK is threatened with a potential separation from Scotland, the Eurozone is at greater risk of seeing member states fragment into anti-EU entities in 2017.
With the Dutch election wrapped up, the main events of 2017 for the Euro will remain election-based.
The Netherlands election has largely been a prelude to the main events – France’s current Presidential election and the German federal election in September.
Both votes are set to be trials of faith for the EU and Eurozone, which are coming under increasing pressure from Eurosceptic parties.
The current threats to Eurozone stability are the French Front National and the German Alternative for Deutschland party. In the event that both groups take victory this year, the Euro is likely to come under extreme stain under fears of an EU collapse.
However, if it looks like the European project is still alive and well, the Euro could end the year in a stronger position.
Huw Pill of Goldman Sachs states;
‘The big picture in Europe [in 2017] remains one of continued muddling through growth at a sufficient pace to keep the wheel’s turning [but] not growth sufficient to really solve the underlying institutional weakness in the Euro area and allow Europe to escape from the low growth that it’s been in for a couple of years now’.
The French election has currently reached its second and final stage – if Emmanuel Macron takes victory in May’s vote, then the Euro could surge. Conversely, if far-right candidate Marine Le Pen becomes President then the Euro may slump heavily due to Le Pen’s anti-EU agenda.
The biggest source of US Dollar movement in 2017 can also be summed up in one word – ‘Trump’. The President’s policies and outspoken nature make him an intense influence on the US economy and the US Dollar.
For the first few months of 2017 Trump helped boost US Dollar exchange rates with promises of massive spending and job creation.
Whether this continued rhetoric wears thin on markets remains to be seen, but some of Trump’s more audacious policies like building a border wall and tearing up North American Free Trade Agreement (NAFTA) rules may be enough to tip the balance against the US Dollar.
If it looks like Trump’s plans are overly ambitious or that they’ll do more harm than good, then confidence in the Commander-in-Chief is likely to wane.
Demand for the US Dollar could also be dented if a mutually destructive trade war develops between China and the US, given that it could cause contraction in both world super-economies.
Trump officials have recently taken action against Canadian lumber tariffs; if this is just the tip of an anti-globalisation iceberg then the US Dollar could be weakened with every new ‘America First’ announcement.
The Bank of Canada (BOC) shows no signs of raising Canadian interest rates anytime soon, so the price of crude oil will likely be the main source of Canadian Dollar (CAD) movement over 2017.
Over the year so far the cost of crude has been highly volatile, fluctuating until March before sliding from $53 per barrel to under $48.
This has been largely due to OPEC developments; if the oil-producing cartel continues to struggle with cutting oil production then the price is unlikely to recover. This will reflect negatively on the Canadian economy and may lead to persistent Canadian Dollar weakness in the months ahead.
The other potential source of damage will be any more US Federal Reserve interest rate hikes; if hikes occur without being predicted beforehand then the US Dollar could rally, pushing down CAD in the process.
As well as being susceptible to damage from US interest rate hikes, the Australian Dollar is also vulnerable to changes in the domestic housing market in 2017.
Economists and Reserve Bank of Australia (RBA) officials have voiced fears about a housing bubble and the RBA has a task on its hands to prevent an unsustainable situation from developing.
This might mean that Australian interest rates stay put at 1.5% for the rest of the year, making US Dollar movement the stronger influencer of AUD fluctuations.
Keeping the US in focus, a US-China trade war would have a negative knock-on effect for the Australian Dollar, as being caught in the crossfire might see Australia’s trade links with China tested under stressful conditions.
Last, but certainly not least, is the New Zealand Dollar, which mirrors the Australian Dollar by being vulnerable to US-China trade developments and any further US interest rate hikes.
Domestically, the New Zealand dairy industry is set to move NZD in 2017, although the results of recent dairy auctions have been mixed.
Of the eight auctions that have been held so far in 2017, three have shown falling prices. However, if we see an uptrend in the price of New Zealand’s key commodity the New Zealand Dollar may be in for steady appreciation across 2017.
That concludes our current currency forecasts for 2017. If you have international currency transfers to manage it really pays to keep track of the latest currency news. You may also want to look into your transfer options to ensure you’re getting the best return for your money.
© TorFX. Unauthorised copying or re-wording of this blog content is prohibited. The copyright of this content is owned by Tor Currency Exchange Ltd. Any unauthorised copying or re-wording will constitute an infringement of copyright.