A volatile and wild 2016 is coming to an end and at FXStreet we are already looking forward to what 2017 may bring to the markets, which doesn't seem to be less interesting from a trading point of view. To get a glance on the upcoming trends and developments for the markets, we have asked our best contributors ten questions to help us understand what may be ahead. Here are the views from Barbara Rockefeller, President of Rockefeller Treasury Services, Inc.:
1. What will 2016 be remembered for?
Economically, 2016 is the year “extraordinary” monetary policy came to an end and “normalization” began, albeit not until December. Europe and Japan may still be struggling with deflation or "low-flation", but the US has reached take-off speed.
Politically, 2016 is the year of populism, embodied by Brexit and the election of Donald Trump in the US. Populism is an unholy combination of income inequality, rebellion against elites and elite institutions, wholesale migration and a push-back against migrants, and tribal/racial/religious self-identification. The US is relatively accustomed to these conflicts but modern-day Europe is demonstrating that the pan-European identity imagined by Eurozone founders is weak.
2. Which were your most important achievements this year?
It’s hard to accept that you can have a perfectly accurate forecast of upcoming FX prices and still lose your shirt if your trading system gets out of whack. Just a few points off a desired entry point by the actual entry point can create a cascade of subsequent bad contingency trades.
We hired a first-class programmer to build an MT4 Expert Advisor and it took many months more than planned. We have published trading recommendations for both futures and spot FX for many years, but results were always hypothetical. We never appreciated how hard it is to translate market and limit orders into real, live money trading. Bid-offer spreads are far wider than in the professional market, gaps appear that are not present in the professional market, and other problems. Implementing contingency rules is far harder than it seems on paper. All those promoters who say trading FX is easy are blowing smoke, of course; we just didn’t know quite how much.
3. What emerging trends or issues should traders prepare for in 2017?
The biggest trend is a surprising one—anti-globalization. After twenty or more years of international trade being far down on the list of FX market-moving factors, suddenly we see learned articles in the mainstream press about how it was or was not foreign trade that took away US manufacturing jobs. The name for an emphasis on trade as the engine of prosperity is “mercantilism.” Economists think they killed the idea long ago, but they failed. Vast Chinese trade surpluses and Britain’s Brexit access issues are just the tips of very big icebergs. One fallout will be the return of “currency manipulation” and “currency wars” to the forefront of FX talk.
4. Which will be the best and worst performing currencies in 2017 and why?
Both the dollar and pound will be the best and the worst. The current thinking at end-2016 is dollar parity with the euro in the first or second quarter of 2017, but we should never forget that anti-dollar sentiment lurks not far below the surface. This is the legacy of the twin deficits but also dislike of some US attitudes and policies. The upcoming source of such dislike is almost certainly the incoming President Trump. He may, for example, try to default on some portion of the US debt, failing to appreciate that the sovereign market is different from the private market. Trump has defaulted on many private loans only to get new ones from yet others banks that do not appreciate that “character” includes a deep unwillingness to default on any obligation. Trump has said he will start a trade war with China and will ramp up federal infrastructure spending, too. Candidates hardly ever deliver on campaign promises, nor do they intend to, but we think Trump will deliver on the trade war with China. And China will retaliate. If China announces it is dumping Treasuries by the boatload, or dumping is detected, the dollar will likely hit a brick wall.
As for sterling, the initial Brexit depreciation may have been a classic overshoot, but the recovery is weak, not because post-Brexit data is poor—it’s actually better than expected—but because the government is showing itself incapable of making a plan, any plan, let alone a plan that will meet European demands even part-way. We can easily get another overshoot to the downside.
5. Which under-the-radar currency pair do you expect to make a big move in 2017?
The yuan/renminbi. China is making an effort to have something resembling a free-market currency in an economy and financial system over which it is loathed to cede control. It is torn between wanting a cheap currency to promote exports and a strong one to prevent capital flight. That’s a crude description but not inaccurate. Incoming President Trump is determined to accuse China of being a currency manipulator after many years of the semi-annual Treasury report falsely claiming China is not a manipulator. Trump will not likely change his tune upon getting updated facts. He is all too likely to provoke a currency war with China, perhaps of a nature we haven’t seen before.
6. Which macroeconomic events will have the biggest impact on the FX markets in 2017?
Rising US interest rates (and possibly corporate tax reform) will shit capital allocations, with new incoming foreign direct investment, portfolio changes and repatriation all in the mix. This is the Third Way for yield-seekers that have been hungry for return and dipping into emerging markets or junk to get it. New (but easily foreseen) crises in emerging markets—Brazil, Venezuela, Turkey—will repel yield-seekers when decent alternatives come into play in supposedly safer non-EM places. Argentina may be one of the only EM’s to thrive (until the next time it runs off the rails, as it is wont to do).
7. Which asset class will cause the next financial crisis?
Currencies. As noted above, the dollar and pound will make the biggest moves, and in both directions, due to erratic and inept leadership. Depending on how big the currency crises turn out to be, gold is the natural winner, not the source of a crisis but rather its reflection. We can easily imagine gold returning to near $1400 and in a very fast move.
8. What will you be focused on next year?
Fact vs. fiction. In the political sphere, over half of what Trump and his followers say is factually incorrect and often downright dangerously so. In the economic sphere, misuse of data can easily get a trade war and a currency war going full-blast. The economics are hard enough for professional economists to get right and keep in perspective. The general public can’t be expected to do a better job. Besides, the public is already prone to conspiracy theories and it’s strangely easy to invent a conspiracy theory about how big shots are managing currencies to rob the little guy of his last penny. The number of people who believe this bilge is astounding.
9. Who are the people to watch in 2017 in terms of impact on the industry?
Politicians--Trump. May. Xi. Tsipras. Putin. Notice that central bankers are not on the list—last year it was Draghi and Draghi all the way. Now Draghi has acted and seems not to have any more aces up his sleeve, and besides, the focus has shifted from central bankers to politicians.
10. What are your New Year's resolutions?
To keep my head about me while all others are losing theirs, to misquote Kipling. It may be true that there is never anything new in finance that hasn’t happened before, but it will still be hard to identify the true nature of whatever crises come along, in part because ideologues can dominate the news cycle and FX traders are literally paid to respond to soundbites. The next FX market shock, assuming it’s a currency war and comes from Trump, will seem like a unique one-time-only event.
It won’t be, but due to the limited life experience of most people in finance, it will seem new. Only the real old-timers and fans of economic history will know about the 1970s, when the US targeted the level of the dollar and intervened like crazy to get it. Go look up why then-Treasury Secretary John Connally said he could tell the Europeans “the dollar is our currency, but your problem." This was at G7 in Rome in 1971 and under President Nixon, whose administration was over long before the current crop of traders and analysts were even born. But that statement sounds positively Trumpian, doesn’t it? Now go look up what happened to the dollar in the 1970’s. Dollar/mark fell from 3.2139 at end-1973 to 1.7106 by end-1979, or almost half.
We may say the large decline was due to a dozen factors, including the end of Bretton Woods, the first major currency float, delinking from gold, and so on. But a key point remains the “America first” stance, with “and to hell with everyone else” muttered under the breath. Trump himself may alternate between wanting a strong dollar and a weak one. Trump is spectacularly uneducated and uninformed about FX, and because he is reckless and impulsive, has a large capacity to scare FX traders.
How do analysts judge when trader panic is justified or not? Even when traders know or suspect that a particular bit of news is not true, they still must trade as though it is to avoid losing the opportunity. The tricky part for the FX analyst is not only knowing what is true and will be lasting, also but guessing at what point traders will accept or reject any particular piece of news--or just get tired of it and over-invested in the position. We have little guidance from experience or history to help us find tipping points after the next Shock. For an analyst to maintain perspective is going to be exceptionally hard next year.
This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.