January 9, 2017

2016 has been marked by a number of events that strongly affected financial markets. First and foremost is, of course, Brexit, the election of Donald Trump as US President, as well as persistent rumours of a possible disintegration of the European Union, which have seriously changed the balance of forces in the struggle of major world currencies.

So what should be expected from the pound, dollar, euro and yen in the new 2017?

With respect to the European currency, the forecasts look rather pessimistic. Referring to the European Central Bank (ECB) data, The Wall Street Journal estimates that capital outflows from the euro area reached their highest level since the introduction of the euro in 1999, and the currency itself has updated 13 years’ lows.

According to analysts, chances of an ECB interest rate increase do not exist, while the US Federal Reserve (Fed) not only lifted the rate by 0.25% in mid-December 2016, but also foresees three other similar increases throughout 2017.

Citigroup specialists expect the US currency to continue to grow. Further to that, the bank's strategist Todd Elmer said in an interview with Bloomberg: “We might see a much more rapid appreciation of the dollar than many in the market expect." The reason for this, in the first place, lies in the fact that the Fed will raise rates at a faster pace than initially expected. The head of the Federal Reserve Janet Yellen has noted that the rise in rates is a sign of confidence in the American economy, and that the Fed will take into account a possible increase in tax incentives promised by President Trump.

"It is possible,” says the leading analyst of the NordFX brokerage company John Gordon, “that in the context of the events that may occur in Europe, Brexit will seem like a nuisance. For some reason, only the upcoming elections in Germany and France and the migrant crisis are usually talked about when listing risks. But in fact, the list of threats that the euro faces is far from exhausted by them. I can name at least another six or seven.”

“Someone has decided all of a sudden that the economic crisis in Greece reached its peak in the summer of 2015. But this is not true – it suffices to say that at the end of 2016, the tax debt of Greek residents reached an astronomical figure for the country of 94.2 billion euros. It is quite probable that this will very soon 100 billion, while there is no reason to expect opposite, positive dynamics.”

“Financial problems similar to the Greek ones can be seen in Italy and Spain. Only, unlike the Greek case, they are intensified by separatist sentiments amongst some parts of the respective populations in these countries. Recall the December referendum in Italy or the tension between the Madrid and the Catalan authorities in Spain.”

“Let's add to this the rise of the extreme right in Austria, the discontent with the migration policy in Hungary and the worsening of relations between Turkey and Europe, on the back of which President Erdogan has once again started to build up relations with Russia.”

“Only when we add to all this the local or parliamentary elections, which are scheduled for this year in a number of EU countries,” continues the NordFX analyst, “do we start realising what hard times are coming up for the EU as a whole and the euro in particular."

“If a few months ago major currency players retained some optimism about the future of the euro, now many of them have already revised their forecasts downwards.”

According to the British firm IHS Markit, the euro will reach parity with the dollar by the end of 2017. Royal Bank of Scotland analysts agree with this view. Due to the extension of the ECB's program to buy € 80 billion assets a month, they say, the EUR/USD pair will be able to stay in the range of 1.00-1.10. But the major investment bank Goldman Sachs has lowered its forecast below parity, from 1.00 to 0.90.

If we talk about the British currency, despite the Brexit (or indeed because of it), its future looks more optimistic than that of euro.

JPMorgan bankers believe that the rate of GBP may increase or decrease by 5-10%, depending on the UK government's actions with respect to accessing the single market. “The pound is facing periodic bouts of volatility and may change direction several times depending on political decisions,” says Paul Meggyesi of JP Morgan. As for the forecast, the bank's experts believe that the GBP / USD pair will be in the area of 1.26 by the end of 2017.

The currency strategists from ANZ Bank and ABN Amro believe that the pound will be weaker against the dollar, but will strengthen its position relative to the euro. “This is because”, says the ABN AMRO analyst Georgette Boele, “the political uncertainty in the euro area will put pressure on the euro across the board. Brexit is no longer the centre of attention in the financial markets, so the pound is likely to be relatively stable.”

The USD/JPY pair, according to the Royal Bank of Scotland, will be traded in the range of 110-120 throughout 2017, as the Bank of Japan will maintain monetary policy parameters stable and will continue to keep the yield on 10-year bonds (JGB) near zero. As for the experts from IHS Markit, they believe that thanks to the strengthening of the dollar, the pair will reach the 126 mark.

"The actions of Trump's administration and rate hikes by the Fed,” says John Gordon of NordFX, “will lead to the unwinding of inflation and the weakening of the national currency in a number of countries that are dependent on the US Dollar." At the same time, according to Bloomberg, the Russian rouble looks very promising for investors in 2017 when we consider emerging markets. According to the UBS Group AG estimates, the return on investment of the rouble on the carry trade strategy will be 26%, and this will be the best result among the markets of Europe, the Middle East and Africa.

The list of attractive countries less dependent on the risks associated with the actions of the USA also includes Mexico, Brazil, Chile, South Africa, India and Indonesia.


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