2017 is fraught with risks for currency investors - Scotiabank

Analysts at Scotiabank explained that the outlook for 2017 is fraught with risks for currency investors; markets will have to grapple with the implications of President-elect Trump’s win in the US Presidential election, the apparent rise of populist and anti-globalist politics in Europe and the UK’s Brexit process, among other geo-political challenges.

Key Quotes:

"In addition, rising US interest rates represent the first serious, although still limited, step away from ultra-accommodative monetary policy settings that have characterized the play book in most central banks in the developed world since the financial crisis.

With risk comes opportunity, however. We expect FX volatility to remain elevated in the coming months. This will be a function of heightened uncertainty as much as the changing monetary policy backdrop. However, the investing environment is not obviously “target rich”, especially in the G-10 space as late year movement has already driven the USD to quite lofty levels.

Our official forecasts imply only limited scope for additional, gains in the USD overall in 2017 and we remain very conscious of the lengthy secular bull run in the USD that we thought was starting to look mature last year.

We think the USD will continue benefit from an obvious divergence in growth and monetary policy trends next year, however, as no other major economy will be able to match the US pace of growth and no other major central bank will be able to match even the moderate tightening we anticipate from the Fed in 2017. We expect the Bank of Canada, Bank of England, Bank of Japan and European Central Bank to retain their current policy settings through the entirety of 2017.

Historically, secular bull trends in the USD have been supported by superior growth and relatively higher interest rates. Regulatory divergence—reflecting the new US administration’s pro-business leanings—may represent a third, powerful force to which add additional momentum to those other two factors and further support the USD. Moreover, the imposition of a US corporate tax holiday by the Trump administration, which may generate substantial repatriation flows back to the US, could provide the USD with an additional tailwind in the coming year."