Currencies to watch during times of uncertainty

2016 has been a year full of surprises, from the UK’s Brexit vote to US presidential election. Which currencies should investors be turning to during such unpredictable times?

2017 and the years beyond are set to feel the ramifications of 2016’s decisions, as President-elect Donald Trump introduces his policies in the New Year and the UK continues its negotiations with the European Union up until potentially 2019.

Foreign exchange markets have already shown the knock-on effects of the initial market reactions, with the dollar and pound both weakening during the immediate aftermath of the EU referendum of presidential election. Now, political predictions, speculation about the health of the global economy and monetary policy developments all form part of traders’ daily analysis of a deluge of economic data.

“Every so often, a major political event transpires that rocks the currency market, bringing with it unprecedented levels of volatility. 2016 has produced at least two of these events in the form of Brexit and the US presidential election result,” says Evdokia Pitsillidou, Risk Management Associate at forex and CFD broker easyMarkets. “These political forces have created serious volatility in the market but have also created some interesting opportunities, particularly in terms of currencies to watch over the remainder of this year and the start of 2017.”

The pound has been under particular scrutiny since the UK’s decision to leave the European Union on 23rd June. The referendum’s outcome triggered the biggest ever selloff in the history of the British pound. Sterling plunged at a double-digit percentage pace against the dollar immediately following the news of the Brexit decision. It went on to hit 168-year lows in October 2016 after Prime Minister Theresa May vowed to pursue a “hard Brexit”.

Sterling has since recovered in November, although continues to trade near 31-year lows – a low that has been compensated for by many European property markets with their own record low mortgage rates, and has been taken advantage of by many overseas real estate investors from countries such as China.

“It goes without saying that the British pound should be on every currency trader’s radar,” adds Pitsillidou. “The pound remains highly vulnerable to Brexit headlines. This actually served as a positive for the GBP/USD earlier this month, after the British High Court ruled that Brexit cannot be implemented without parliamentary approval.”

The dollar has also been impacted by recent political events, with Donald Trump’s election as the 45th President of the United States on 8th November sending global financial markets into disarray – at least initially. By 9th November, US stocks were back on the offensive, while global equities also rebounded. The presidential election result has now proven a boon to the US dollar, which quickly rose to 10-month highs against a basket of other major currencies.

Pitsillidou comments: “Many analysts had tipped the dollar to fall on a Trump victory. However, the complete opposite occurred, as investors turned optimistic on Trump’s proposed tax reforms and fiscal spending plans.”

Speculation regarding the Federal Reserve’s plans has also been affecting the value of the dollar. The greenback was tracking higher weeks before Trump’s election, based on growing bets the Fed would raise interest rates in December. Federal Reserve Vice Chair Stanley Fischer told a conference this month that the case for a rate hike is “quite strong”.

The Japanese yen is also a currency that should be on traders’ radar for the remainder of 2016. The Bank of Japan’s policy overhaul a few months ago saw its focus shift from quantitative easing to interest rate targeting, following years of failed stimulus.

“Japan has been in deflation for seven consecutive months, and while economic growth has improved, the underlying trend remains weak,” explains Pitsillidou.

The yen has been the strongest major currency for much of 2016, thwarting the Bank of Japan’s attempt to stimulate the economy. However, renewed bullishness in the dollar has made a dent in Asia’s safe-haven currency; October was the strongest month for the USD/JPY in two years. The pair was last seen trading at five-month highs.

“In times of such immense political uncertainty, financial markets will remain highly sensitive to goings on around the world. However, the swift recovery of the US stock market and the rise of the dollar following Donald Trump’s election victory shows that markets can still be resilient,” says Pitsillidou. “This means that traders who act fast are likely to be able to maximize the benefits of political events, particularly so far as currencies are concerned.”