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Strategy Video: Euro: The Most At-Risk Major Currency in 2017

Strategy Video: Euro: The Most At-Risk Major Currency in 2017

2016-12-29 04:21:00
John Kicklighter, Chief Strategist
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Talking Points:

  • All major currencies have both risks and opportunities heading into the new trading year, but some tally a riskier score card
  • The Euro shares a monetary policy issue similar to the BoJ and a trade barrier akin to the Pound with Brexit
  • What pegs the Euro as the most at-risk major is the systemic threat of member nations quitting the common currency

See how retail traders are positioning in the majors using the DailyFX SSI readings on the sentiment page.

Each currency has a list of things that can turn the market in its favor and an equivalently long docket that can send it plummeting. Yet, Foreign Exchange puts us in the relative performance frame of mind. And so, it is worth considering which of the majors is facing the greatest risks among the majors heading into 2017. It is important when making a reasonable threat assessment moving forward not to fixate on near-term or limited concerns nor to weight to heavily the extremely unlikely scenarios (like the default on US debt).

If we were to make our ranking on current issues, there is a good chance that the Pound, Dollar or Japanese Yen would top most lists. The Sterling took a severe hit after the Brexit vote for the UK to withdrawal from the European Union. We have yet to see the negotiations truly start and the full scale of a messy divorce is open-ended to say the least. For the Greenback, the vow by the Fed to tighten rates three additional times in 2017 and the dramatic vows by incoming President Donald Trump can significantly change the bearing for the US economy and market. From Japan, the issues are arguably more systemic between diminished effectiveness in massive stimulus and demographic issues weighing growth and financing. All notable and probably issues, but falling well short of scale of risk that the Euro faces.

The ECB's decision to extend its stimulus program this month highlights the deflating pressure of more currency being pumped into the system as well as a very prominent slide in the effectiveness of the central bank's effectivenss. This in turn leads into the unique 'risk' relationship that the Euro has experienced - particularly to the Dollar - over the past few years. A temporary turn towards a seeming 'safe haven' alignment was not due to its virtues but rather the speculative excess of the Dollar. These issues will surely factor in to the Euro's bearing and volatility in 2017. However, the far systemic risk for the shared currency is the existential threat to the Union's stability. The UK's vote to leave the European Union significantly bolsters the threat of a discontent member leaving the European Monetary Union - the group that shares the currency. Such a scenario would permanently change the liquidity and ranking of the world's second most liquid currency. We assess the threat to the Euro in 2017 in this Strategy Video.

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