Snap Election Triggers Pound Volatility

by:
Portfolio Strategist, MainStay Investments
  • Some big currency movements this week were the result of news out of the United Kingdom, as pound sterling volatility has increased before the snap election scheduled for June 8.
  • The Japanese yen continued to benefit from diminishing expectations that the Trump administration can implement fiscal stimulus.
  • The U.S. dollar seems to have found some support against a basket of currencies at its current range, which is about even with its pre-election levels.

Big currency movements came this week, as sterling volatility has increased before the snap election in the United Kingdom on June 8th. The pound has borne the brunt of increasing market tensions from conflicting polls over the general election outcome. Just two weeks ago, the conservative party was expected to increase its majority in a landslide victory. Today, some polls suggest that the conservative party will actually shrink, resulting in a hung parliament. Markets do not like this prediction, as it undoubtedly results in more policy uncertainty as Britain heads into exit negotiations.

After rapidly appreciating following the election of President Trump, the dollar has faced many headwinds, and political uncertainty has continued to flow out of Washington and depress sentiment. The dollar has fallen more than six percent against a basket of currencies from its highest levels in December 2016, but the dollar seems to have found some support at its current range, which is about even with its pre-election levels. The outlook, however, remains uncertain. The diverging prospects for monetary policy remain supportive of the dollar, but they may not be able to outweigh economic improvements abroad.

Currency Movements Are Hard to Predict

EUR
 
JPY
 
INT’L
 
5|30 0.03% 0.85% -0.07%
5|23 0.90% 1.20% -0.77%
5|16 1.92% 0.76% -1.56%
5|9 -0.51% -1.75% 0.69%
5|2 0.04% -0.81% 0.19%
4|25 1.83% -2.40% -0.72%
4|18 1.18% 1.10% -1.20%
4|11 -0.65% 1.02% 0.17%

Source: Bloomberg, 4/11/17–5/30/17. 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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Robert Serenbetz

Portfolio Strategist, MainStay Investments

Robert Serenbetz is the Portfolio Strategist for Strategic Asset Allocation and Solutions Group (SAS). He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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