Will the King hold its Ground in 2017

Outlook 2017: What to Expect from FX, USD and Oil in lieu of GLOBAL EVENTS.

2016 summary

The political and monetary policy turmoil’s of 2016 yet again helped the US Dollar bag the title of currency king. After a long pause the US Dollar index rose to a record level of 103, its highest level in more than 13 years. So how will 2017 shape up for Forex Market? Or the political events will produce another dramatic year for the Financial Markets??

US ECONOMY AND FED OUTLOOK

Image source-Adam zygis

US economy is currently enjoying a far superior growth from 2nd quarter (ATLANTA FED is projecting 2.9% growth) from rest of its peers and looking to gain further momentum as Donald Trump officially takes office on 20th Jan, 2017. One of the main reasons for this optimism is his promise to start a new fiscal spending on infrastructure and lowering of taxes. He is also planning to change border tax system which will force US and overseas manufacturers to produce domestically.

All these changes will bring more employment and higher wages for US citizens and a better GDP data in the forthcoming years. Presently US is nearly at full employment according to DECEMBER 2016 employment report, wages are also highest since 2009 (i.e. 2.9%). So further improvements in these conditions will warrant higher interest rates to prevent inflation overshooting. So USD bulls should be very happy.

FED

Federal Reserve reached to a crucial point when they hiked interest rates only once in 2016 and promised a better rate hike path in 2017 with 3 hikes announced this year around. Different Fed Reserve Presidents have been saying since Friday’s payroll report that the employment component of the Fed’s dual mandate has been fulfilled and their tone suggests that despite lower than expected payroll data, they are ready to raise interest rates. The timing and size of Trump’s fiscal stimulus and its affect on the US economy is very crucial. The Fed will be very watchful until March and only then they can better project future hike path. But this whole scenario should be positive for USD.

Europe outlook

Europe will also go through some major political turmoil, as 7 countries will hold parliamentary and general elections this year. In France, the emergence of the Front National the hard-right populist leadership is being seen as anti EU as they want France out of the European Union just like the UK. In Germany, Mrs. Angela Merkel will likely run for the 4th time as German Chancellor. Other than that Netherland, Norway, Serbia and Czech Republic will also hold their general elections in 2017. So there will be a lot of political uncertainties surrounding Europe and the EU.

UK was not the only country that was unhappy with EU policies. Voices of dissent in other EU member countries are also rising such as France, Spain, and Portugal. One reason for this could be that Europe is not generating significant growth. In recent times Europe also saw highest number of immigrants inflow due to Syrian crisis, a failed monetary policy, lack luster growth, Italian bank failures are big questions on EU integrity. These entire factors will have their affects on the EUR in 2017.

ECB is satisfied now with some better than expected year end employment report and inflation numbers. FED rate hike will certainly keep the EUR under pressure. As the QE time period is also coming to an end in 2017, will the ECB opt for an extension of QE or will it start to diminish it remains to be seen. ECB should not make a major shift in their monetary policy but Draghi is an expert in dropping bombshells in the market when it is least expected of him. Amid all this political and financial instabilities, the EUR is poised to remain under pressure in 2017 against the mighty Greenback.

UK OUTLOOK

After the British citizens announced their divorce with the European Union, British PM Theresa May will formally act upon it by triggering ëArticle 50í by the end of March 2017. Till now things are looking normal post BREXIT but are we looking at calmness before storm. As in future companies with their operations in the UK will look to shift their businesses elsewhere. The UK government will have to do major policy changes to keep Investor’s faith in their country.

Therese May will also face local elections in April, 2017 and first time, she will get to know people’s mood about their Party post BREXIT. So overall GBP should remain under pressure against all major currencies, after seeing some relief rally post BREXIT against the crosses.

YEN Outlook

After the ABENOMICS of Japanese PM, things are calming down in Japan. Bank of Japan is happy with current USD-JPY levels. So JPY should be weakening further against USD on basis of rate differentials, only if things remain calm in financial markets.

CAD outlook

As crude oil prices are stabilizing it is bringing more optimism in Canadian economy as hiring is picking up and trade margins are also improving. With US economy set to grow at a higher pace with more fiscal spending, CAD will be the biggest beneficiary of this as more than 60% of their exports goes to US. NAFTA is also not a big risk for Canada like Mexico. So if things remain as expected CAD should outperform other major currencies but should be lower against GREENBACK on rate differential basis.

Australia and New Zealand outlook

The future of AUD and NZD will depend indirectly on US-China relations as 50% of Australia’s exports go to China. And if US blocks Chinese goods from entering its territory then it can have an indirect affect on Australian economy. Off late Australia was enjoying a better trade margins and better business conditions. But the last two quarterly GDP data showed disappointingly negative growth. So an overly optimistic view about AUD should be avoided and caution mode should on. RBA is also expected to hold on any further monetary policy actions until June but they should avoid sounding overly hawkish.

In New Zealand, things are looking in better shape. Economy is growing, employment is up, currency is at lower levels and expected to remain there, inflation is picking up, housing market is also stabilizing and they have diverse trading partners than Australia.

So banking on the positive data, the New Zealand Dollar should outperform AUD in 2017.

Crude oil and OPEC

After a delayed but historic deal between OPEC and Non OPEC countries to cut crude oil output levels, things are looking better for Crude oil. The implementation of this deal requires a sincere approach and commitment from all the member and non member countries. What remains to be seen is whether the members keep their vows or will someone emerge as a deal breaker.

US-CHINA-RUSSIA relation can also affect crude oil demand and can halt crude oil price rally, which is looking to run out of steam and run out of reasons.

So 2017 will be a very interesting year to watch out for:

  1. Trump’s policies
  2. FED hikes
  3. Euro zone political and monetary policy turmoil
  4. BREXIT negotiations
  5. EURO-USD parity
  6. Crude oil deal breakers
  7. And the Mighty Buck’s strength
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  • Adif Khan

    ur blogs are very helpful . keep it up

  • Shri Bhagwan

    nice article

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