It’s shaping up to be a big week for the global forex markets as investors await the results from the Dutch election on Wednesday and an expected rate hike from the Fed on the same day. Pile on Theresa May’s triggering of Article 50 slated for this week or next and ten days of consecutive losses for the Kiwi and it’s clear that everyone should be paying attention to how forex will impact their personal finances in 2017.
While most of these events are already priced in by the market, turbulent times could mean larger than normal currency fluctuations in the weeks and months ahead.
Dutch Election Jitters
This weekend saw violent protests erupt in Rotterdam when the Dutch government prevented Turkish ministers from canvassing Turkish expats ahead of a critical constitutional referendum in Turkey. The action fueled more discussion over immigration and Islamophobia ahead of the Dutch election where ultra right candidate Geert Wilders has gained substantial ground in recent polls against more moderate parties.
Amidst the fray, Turkish president Erdogan labelled the Dutch as ‘Nazis’ while the current Dutch Prime Minister, Mark Rutte, said the Netherlands would not succumb to Ankara’s threats of sanctions.1
Erdogan is already on the backfoot with the Turkish lira (TRY) having lost half its value against the USD the last five years due to political turmoil and a coup d’etat attempt in 2016. While the euro may experience a bit of a sell off in the aftermath of the Dutch election if the PVV’s candidate Wilders gets in, the fact that he will struggle to form a coalition government means the volatility may be short lived or postponed til later in the year as Germany and France go to the polls as well.
Article 50 Triggers
Theresa May promised to activate Article 50 by the end of March to initiate the formal withdrawal of the U.K. from the E.U. With the pound recently priced at about $1.21 U.S. dollars, some investors believe it could go as low as $1.17 when Article 50 is triggered. The pound may experience a mild relief rally as Article 50 takes effect, as it did after May’s speech at Lancaster House in January, if clarity and assurance around Brexit policy stimulate market confidence.
However, it’s more likely that triggering Article 50 will underscore the uncertainty that looms around the Brexit negotiations thereby driving down the pound. Recent gains against the USD could be short lived as dollar weakness following this week’s announcement from the Fed is not expected to last long.
Article 50 starts the clock ticking on a two-year negotiation period for divorcing the E.U. The critical factors influencing the value of the pound come from the trade policies and immigration restrictions. Firm details may not eventuate for a full two years.
Fed Rate Hikes Predicted
As the U.S. heads for maximum employment and nears the inflation target, forecasts suggest that the Fed will bring forward anticipated rate hikes. A quarter-point increase in short term rates is expected for Wednesday as U.S. unemployment data surpassed expectations.2 After a series of hawkish updates from Fed board members, markets have priced in the likelihood of a rate hike at 100%.
At the conclusion of last week, the NZD was on its 10th consecutive day of losses as the USD climbed amidst the projected interest rate hikes. Meanwhile, NZD tumbled further as prices for whole milk powder (a key export) dropped. Over the last 3 months, the kiwi has been the worst performing G10 currency as economic fundamentals continue to favour AUD over the NZD.
In the months ahead, Europe will see two more major elections in France and Germany. The Fed is expected to have 2-3 rate hikes this year, and the markets are still waiting for clarity around Trump’s revisions to taxation policy. In short, when it comes to currency market turbulence, there’s more in store.
If you’re concerned about how currency fluctuations will affect your acquisitions or overseas investments, consider using a Limit Order to set a target exchange rate, so you don’t miss out on profitable currency movements.
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