A Most Peculiar Time

October 17, 2016

Precedent plays a central role in currency forecasting whether one relies on fundamental economic analysis or technical analysis. However, things have changed so profoundly in 2016 as to render precedent inapplicable in explaining the present or projecting the future.

Doubts have arisen about the laws governing macroeconomic relationships in the face of things behaving differently now than in the past. So widespread is this development that Fed Chair Janet Yellen devoted an important address last Friday to imploring the economics profession to intensify research in a number of areas.

Political currents are inspiring deep fear among investors. Ordinarily, the impact of political events on market activity is comparatively fleeting. Not so this year, as political upheaval has dominated the performance of many currencies all year. Brexit and the U.S. election next month have been especially in the limelight. Because the British vote to abandon the EU had not been predicted, the initial market reaction of sterling depreciation, lower gilt yields and selling pressure on U.K. stocks was typical. This soon gave way to a stable phase, but that calm also was short-lived as the new government set a timetable for the exit process that is more immediate than had been anticipated.

The attention of investors to the U.S. election has followed a similar may to the Brexit saga. The deep concern last spring gave way to relaxation in August when Clinton seemed destined to win comfortable. Fresh fear set in last month when opinion polls narrowed, and even though the latest signs support the original belief that Trump would lose, there’s less relief than before. The election campaign is telling the world much more about the state of America than about the Republican standard-bearer. Barack Obama inherited an economic disaster, but it’s feared that Hilary Clinton may be walking into an even more dysfunctional democracy. Trump and his supporters will remain a formidable opposition and force for sabotage.

The dollar has been the linchpin of the post-WW2 international monetary system, so not just the dollar’s performance will be entering a new chapter on November 9. The system that sets prices for the exchange of national monies could become perceived as less stable and predictable than before. A large part of the U.S. population has rallied around a call for radical change foreign policy, immigration policy, international trade, and the treatment of minorities may not accept the legitimacy of a vote that fails to elect Donald Trump. And if he wins, no restraint is likely to be shown as the new government overhauls American life.

The United States is not an isolated example of a nation or region dealing with very difficult challenges to its brand of government. It still often seems that only the timing of the end of the common European currency experiment is unknown. The fragility of the regions banks could intensify once the U.S. election has come and passed. In Japan, Abenomics hasn’t achieved Japan’s inflation objective, and the credibility of the targets is the lowest its been. China could be the venue of another huge debt crisis, and authoritarian rule there has not diminished as hoped. Russia may consider new mischievous provocations to test the next U.S. government, whatever its colors.

For all the uncertainty churning around, the dollar compared to its pre-Memorial Day holiday levels late last May shows a net rise of only 1.3% against the euro, an uptick of 0.1% against the loonie, and a downtick of 0.3% against the Swiss franc. Losses of between 5% and 6% have occurred against the yen, Aussie dollar and kiwi, and there’s been a relatively significant 2.6% advance against the Chinese yuan. The dollar has soared 20% against sterling, which had been the world’s currency hegemon before the dollar grew into that role. 2017 figures to be a more volatile year for currencies than 2016 has been so far. In addition to the above uncertainties, it remains to be seen if fiscal policy, which has been largely missing in action for the past five years, will lend support to the over-taxed role of monetary policy in keeping global GDP from stall speed.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



Comments are closed.