Just as we enter the New Year analysts are publishing their opinion pieces for 2017.
FX Primus’s market analyst Marshall Gittler is one such analyst, and his view for the year ahead for G10 currencies appears both interesting and comprehensive.
Gittler says that the Pound is likely to stay resilient up until Q2 when it will probably start to weaken as concerns over Brexit resurface.
“By the late spring, concerns about European politics should be waning just as Britain triggers Article 50 and the wrangling over Brexit begins in earnest.
“At that point, the full impact of this historic move is likely to hit the markets and the pound is likely to suffer another leg down, in my view,” says the analyst.
The forecast is the same as Société Générale’s who also see sterling resilience in Q1 2017 until Brexit is triggered and then weakness in Q2 and 3.
The Dollar will strengthen in 2017, says Gittler, although he is less aggressively bullish than markets, seeing several headwinds slowing the currency’s advance.
The main difference between Gittler’s view and the market’s is in the extent to which Trump’s spending promises will be realised.
The Republican-controlled Congress is likely to oppose the full scale of Trump’s spending plans, and whilst some plans will get passed they are likely to represent only a fraction of the original spending promise.
The Federal Reserve continues to see a probability of more interest rate increases in 2017, regardless of whether Trump’s stimulus policies are realised
This alone is likely to keep the Dollar rising, says Gittler, even if there is less of a fiscal stimulus boost.
“Nevertheless, I still expect the dollar to strengthen further.
“There’s likely to be some fiscal boost, if not everything that Trump hopes for.
“Moreover, the Fed recently boosted its interest rate forecasts without even assuming a more expansive fiscal policy.
“Thus, the monetary policy divergence that’s kept the dollar rising for several years now is likely to continue into 2017, albeit with perhaps more volatility,” says Gittler.
The Euro is likely to trade volatile with a weak start to the year due to heightened political risk but then strengthening as the year progresses and political risk unwinds.
Gittler sees little chance of an actual disintegration of the Eurozone resulting from any of the Eurozone elections in the coming year.
“I expect the elections to pass without much lasting impact and that the pro-EU establishment parties will continue to govern.
“In particular, I don’t expect the National Front to come to power in France.
“That should mean less political tension in the Eurozone after May, just in time for people to start worrying about Britain again,” says the FXprimus analyst.
The Australian Dollar is expected to weaken as a result of a slowdown in the Chinese economy due to its ‘chicken’s coming home to roost’ when the economy starts paying the price for the record high levels of debt it has accumulated.
An expected slowdown in the Chinese property market, however, is likely to be the main cause of Aussie weakness as it lessens demand for Iron Ore and other construction resources.
“China takes 32% of the country’s (Australia's) exports and developing Asia overall takes 48%.
“A slowdown in China’s growth, particularly in its property sector, will hit Australia’s exports of iron ore and coal,” said Gittler.
The Kiwi (New Zealand Dollar) is likely to fare comparatively better than the Aussie as its main exports are agricultural, including food and wine and these are not as susceptible to a slowdown in China.
“If the economy slows, people may eat less but they will still have to eat. Moreover, milk prices have been rising recently, in contrast to iron ore & coal.,” said the analyst.
The Canadian Dollar (loonie) will probably outperform both the Kiwi and the Aussie, however, as the booming US economy will continue to favour a rise in Canadian imports, despite Trump's pledge to renegotiate NAFTA.
“73% of Canadian exports go to the US, which I expect will continue to enjoy fairly robust growth in 2017. If the USD continues to rally because of a strong US economy, Canada should be a major beneficiary. That ought to help the CAD outperform the other commodity currencies,” remarked Gittler.
Finally, the Yen is expected to weaken as the Bank of Japan maintains its programme of money printing and keeping interest rates at record lows.
Their decision to target 10-year government bonds in their QE programme in order to keep yields at 0.0% is one policy, for example, likely to weigh on the Yen given 10-year bond yields in most of the rest of the world are set to rising.
Currnecies with higher yields tend to attract more investment as they offer international investors higher returns.