Following Christmas, currency markets appear lethargic too. The low liquidity environment of the end of the year has seen most currencies stay within a very tight and unthreatening channel. Today, the biggest major mover of the day was the US Dollar. Today’s market movements seem rather reminiscent of the entire year: a mixed pound sterling, struggling for definitive direction and largely unchanged. The Euro: advancing strongly with intraday gains just shy of +0.5% and year to date advancements scraping close to +10%. The Dollar: yet another bearish episode; down by up to 0.5% on the day and with losses in excess of 11.5% (against the Euro) throughout 2017. Below I question what will 2018 hold for FX markets.
Sterling Briefing: Another year of Brexit?
2016 was the year of Brexit… Without a shadow of doubt. But what with Lancaster House, Florence, and sufficient progress to name but a few of 2017’s Brexit events, perhaps this year too has been the year of Brexit. With Britain’s official secession from the European Union not until March 2019, next year could be a politically driven roller-coaster too.
One theme that has pervaded through Brexit ups and downs has been a consistently bullish Pound Sterling from the shock lows of late-August. It is highly possible that 2018 sees the British currency trade within a channel capped by parity at the lower end and 1.20 at the upper end. However, a more optimistic analysis would note the consistent support for the Pound outside of devastating Brexit events.
A simple projected regression of the illusive positive trend would suggest that by the end of 2018, the Pound would be trading close to 1.18 against the Euro and just shy of 1.50 against the US Dollar. Moreover, these projections are not dissimilar to the projections of many major market participants.
Euro Briefing: Blink and You’ll Miss It
The region of Catalonia has a dichotomous framing across the globe: a virtuous and democratic freedom of expression versus an illegal, destructive movement. Whatever the more accurate view, markets should be focusing on one thing: a rise in systemic political risk and uncertainty within the devolved regions, Spain and the Eurozone is inevitable. Therefore, what remains puzzling is the insensitivity of currency markets, and the trading value of the Euro, with meaningful developments of the Catalonian political challenge. This likely uncovers the newfound bull-bias of investors with respect to the Euro. However, the tension might be visible beneath the surface, escaping only on Christmas Day.
In the late afternoon on the 25th November, according to Bloomberg data, the Euro slid by around three percent against the US dollar in all but a matter of minutes. The rapid devaluation, or ‘flash crash’ saw the Euro fall to a value of less than 1.17 Dollars. The move has been attributed to algorithmic trading in a low-liquidity market. Only a few hours later, the pre-disturbance value that threatened 1.19 returned.
What will become increasingly important is what activated the algorithmic trading devaluation. Besides reactive pricing action, it is plausible, if not likely, that mistaken pessimistic Catalonian news and Eurozone uncertainty caused the sell off of the Euro. If this conjecture becomes verified, there is significant potential for 2017’s bullish Euro, the best performing G-10 currency, is winding down. Whilst there remain few Dollar bulls in the market, a change of market dynamic could be possible, especially when considered alongside forthcoming Italian elections and an as yet incomplete German coalition deal.
Dollar Briefing: Fake News
The US Dollar has lost considerable ground this morning, rounding off its abysmal year-to-date performance. A Dollar short has been one of the best investments of 2017 alongside the likes of the crypto-currency explosion and Portuguese public debt. While many investors lost out, the 2017 bullish Dollar was nothing but Fake News.
The Days Ahead:
As we hope you continue to enjoy the festive season, we will bring you a year end round up as we approach 2018. With the largest upside potential arguably within the Pound next year, we await to see whether British optimism has the better of us!
Discussion and Analysis by Charles Porter