How are global currencies faring?
2017 demonstrates the extreme volatility of emerging markets currencies as investors scramble to safe-haven currencies.
2 017 demonstrates the extreme volatility of emerging markets currencies. The Russian rouble fell to 57 and the Turkish lira fell to 3.72 on news of the Trump cruise missile strike on Syria as investors scrambled to safe-haven currencies like the US dollar, the Swiss franc, the Japanese yen and gold.
The South African rand tanked 10 per cent after President Jacob Zuma fired his finance minister and international rating agencies downgraded its sovereign debt to junk. The 1MDB sovereign wealth fund scandal that implicated Malaysian Prime Minister Najib Razak and a bear market in oil/LNG led to a collapse in the ringgit to August 1998 lows as global investors exited Southeast Asia’s most foreignowned government bond market. Putin’s invasion and annexation of Crimea led to Western sanctions and a collapse in the Russian rouble from 30 to as low as 85. The Egyptian government’s decision to accept the terms of a $12 billion IMF loan led to a 50 per cent devaluation of the pound last November. Emerging market currency trading is definitely not for windows, orphans and those without abdominal fortitude or at least limitless bank credit lines!
Yet 2017 has also been a highlyprofitable year to invest in certain emerging markets, thanks to a fall in the US Dollar Index from its 102 peak, and $30 billion fund flows into this asset class. Doubts about Trump’s legislative agenda, a dovish Yellen Fed and a rise in global economic growth means it is still possible to make money in emerging markets debt and currencies. The rise in the Indian rupee after the Union Budget and the BJP’s landslide win in the Uttar Pradesh state elections or the Mexican peso’s 11 per cent rise after Trump’s Commerce Secretary Wilbur Ross ruled out an immediate repeal of the Nafta showed that Planet Forex can create both winners and losers in emerging markets!
Even though the 98,000 new jobs in March was well below the 178,000 consensus estimate, the Federal Reserve will treat it as a statistical aberration due to the Verizon strike and the snowstorm-related plunge in new construction jobs from 60,000 to 6,000. This means it is possible that the Federal Reserve will raise interest rates twice in 2017, most probably at the June and September FOMC. Money market futures on the Chicago Mercantile Exchange price a 50 per cent probability of a Fed rate hike in June, despite the weak March payrolls data, a rise in geopolitical tensions in Syria and North Korea. The unemployment rate fell to 4.5 per cent March and the Federal Reserve’s dual mandate necessitates it responds with a rate hike at the June FOMC. This monetary equation ensures that the US dollar will remain well bid, especially since ECB President Mario Draghi has dissed the idea of an imminent taper at his last Frankfurt press conference. If Marine Le Pen wins the French election, it is entirely possible that the Euro could plunge five per cent to parity with the US dollar. If Macron wins the Elysee Palace, I expect the euro to rise to 1.09.
The politics of Brexit and Westminster-Brussels negotiations now that Article 50 has been invoked will continue to dominate the fate of the British pound. The EU’s insistence on a £60 billion “divorce settlement” and the demand for a new Scottish referendum by First Minister Nicola Sturgeon will continue
$12b iMF loan led to 50% devaluation in Egypt’s pound
to pressure sterling, as will the Bank of England’s warning to the City to prepare for contingencies if no trade deal with the EU is possible. In any case, UK construction and industrial production data is now sterling bearish. It is entirely possible that sterling could trade as low as 1.15 in the next six months.
In retrospect, the yen’s response to the Syrian missile strike was remarkably muted. The yen rose to 110 but then depreciated as the yield on the US Treasury note rose once again to 2.35 per cent. The yen is the G-10 currency most sensitive to international interest rate spreads. While risk reversals in the forex option markets suggest the market is nervous about another safe haven rise in the yen if Le Pen wins the French election, the Bank of Japan’s zero-yield control strategy suggests the yen could depreciate to 113-114 in the next two months.
Trump’s Syria missile strikes are a defining moment in international relations. Yet the real economic impact of Trump’s new hard-power diplomacy could be felt in the tax reform debate in Congress or the interest rate deliberations of the Big Four global central banks. The politics of Trump’s fiscal stimulus will ultimately shape US interest rates, the dollar and global currency markets.