Push and Pull on Global Currencies
- Concerns over escalating geopolitical tensions, doubts over U.S. fiscal stimulus, and uncertainty over political battles have pushed and pulled on global currencies. The dollar broadly traded lower.
- The first round of French elections is less than a week away, in what is shaping up to be a very uncertain race. While the euro seemed to shrug off the uncertainty in the polls, one-month implied volatility against the dollar surged, and the cost of downside protection moved significantly higher. The yen moved higher, as it continued to correlate with falling U.S. Treasury yields.
- In the current environment, it remains extremely difficult to predict the direction of currencies. Geopolitical conflicts and other uncertainties both seemingly weigh on and support the U.S. dollar. Meanwhile, volatility in the currency market remains elevated.
President Trump once again commented that the dollar was “getting too strong” in an interview with The Wall Street Journal. These comments come against Washington’s unspoken protocol. Historically, views or actions on any sort of explicit currency policy have remained veiled, or wrapped in the familiar phrase, “a strong dollar reflects a strong U.S. economy, and that’s of U.S. interest.” The executive administration has traditionally coordinated its currency policy indirectly through appointments of officials and through legislative action, leaving only the U.S. Treasury to comment on currency markets. However, both last week’s and January’s remarks on the strength of the U.S. dollar have departed from this tradition.
Looking ahead, the Trump administration has trade policy, fiscal stimulus, tax overhaul, and multiple FOMC appointments on its agenda – each of which could potentially impact the U.S. dollar.
In Europe, the French elections are less than a week away, and the race is certainly heating up in what the pollsters have now identified as a ‘four-way race’. Marine Le Pen and Emmanuel Macron remain at the top of the opinion polls, but Jean-Luc Melenchon and Francois Fillion now stand closely behind. Both Le Pen and Melenchon are viewed as anti-establishment and anti-euro. Investors await the first round which takes place Sunday, April 23, in what is certainly one of the most uncertain presidential elections in France’s history.
Also in Europe, the British pound soared on Tuesday after UK Prime Minister, Theresa May, surprised investors by calling for an early general election. This comes as a big surprise. Late last month, it was said that early elections were off the table, and that the next election would not be held until 2020. Current polls suggest that the conservative party, led by May, would gain a larger majority if an election was held. Investors seem optimistic that an election would lead to firmer political power and an environment to negotiate a better deal. An orderly ‘Brexit’ would likely bode well for both the pound and the euro.
Currency Movements Are Hard to Predict
Source: Bloomberg, 2/28/17–4/18/17. EUR/USD Spot Exchange Rate where the price of 1 euro is in U.S. dollars. The calculation is the one week percentage change in spot exchange rate where a negative value is the depreciation of the euro. JPY/USD Spot Exchange Rate–price of 1 Japanese yen in U.S. dollars. The calculation is the one week percentage change in spot exchange rate where a negative value is the depreciation of the JPY. The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. A negative value indicates a general depreciation of the dollar.
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