Potential Currency Volatility Ahead for 2017

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Potential Currency Volatility Ahead for 2017

By Andrew Hecht / TFNN.com 

At the end of 2016 markets saw a great deal of currency volatility as the dollar moved appreciably higher in the wake of the U.S. Presidential election. The dollar index traded to a high of 103.815 on January 3.
US Dollar Index chart

Source: Barchart

As the long term chart dating back to 1997 highlights, the dollar index moved to the highest level since December 2002. Since then, we have seen a correction in the greenback which has taken the index back to the 100 level, which appears to have become a pivot point for the greenback. However, the upside breakout was a significant technical event and fundamentals in the currency market are pointing to lots of volatility in the months ahead.  

The New U.S. Administration

In the past, many administrations have advocated a “strong dollar policy” for the United States. However, during his Senate confirmation hearings the nominee for Treasury Secretary Steve Mnuchin took a softer tone. While he endorsed a strong dollar he said, there may be times when the dollar has risen to far such as now and “the dollar is very, very strong.” A strong dollar makes U.S. exports less competitive on global markets and President Trump has stated that he intends to tilt the balance of trade back to the U.S. in his “America first” policies to create jobs.

Trade Agreements Will Change

Throughout the course of the election campaign, President Trump took issue with many of the trade agreements put in place by past administrations. One of his campaign promises was the negotiate new and “fairer” trade relationships with the nations of the world. He has often said that he would rather negotiate these agreements on a one-on-one basis with other trade partners to get the best deals for the United States. A change in trade agreement over the coming months and years will likely increase volatility in the currency markets as the uncertainty of the outcome will cause more foreign exchange price variance. While there are plenty of reasons that currency volatility will come from U.S. policy in the months ahead it may be that the biggest swings will emanate from Europe. 

Elections In Europe

The last two biggest shocks to the currency markets in recent years came when the Swiss suddenly removed the peg to the euro in early 2015 and when the British voted to exit the European Union in June 2016.

In 2017, three elections are likely to determine the fate of the European Union in the wake of Brexit. Germany, France and the Netherlands, three of the strongest economies in Europe, will go to the polls to elect leaders over the coming months. With the rejections of the status quo in both the United Kingdom and United States in 2016, nothing is certain when it comes to this year’s European elections. The immigration issue and recent terrorist events in Germany, France, and Beligum weigh heavily on voters and the chances for a dramatic political change has increased. The future of the European Union and the euro will hang in the balance when voters go to the polls. 

Interest Rate Differentials

Finally, perhaps the most influential factor when it comes to currency volatility is the differentials that exit between currencies. Short-term interest rates remain in negative territory in Europe and Japan. The FOMC increased the Fed Funds rate at their December 2016 for the second time in nine years and told markets to expect at least two more rate hikes in 2017. The widening interest rate gap between the dollar and other currencies is likely to cause lots of volatility in the foreign exchange markets in the weeks and months ahead. Volatility creates a trader’s paradise but it also presents peril for those who venture into the choppy foreign exchange markets.

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We could be in for some wild swings in the currency markets in 2017 as events in 2016 have set the stage both political and economic changes and a departure from the status quo. Volatility in foreign exchange markets is likely to reverberate across all asset classes like a tsunami over the months ahead. Nadex products are tools that can help when approaching volatile markets to enhance your portfolio while at the same time limiting risk.


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