Talking Points:
- There are plenty of risks and opportunities for the global market in 2017, and trades will arise from this potential
- Fed speculation is only one aspect of the Dollar's future with reserve status, relative growth and risk trends all key
- Euro will focus on stability, Pound on the Brexit and Yen on the relationship to risk trends with BoJ effectiveness declining
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
There is a lot of fundamental uncertainty facing the global markets moving into the New Year. For the world's most liquid currencies - the 'majors' - there are risks and opportunities unique to the particular region as well as conditions that are systemic to all corners of the market. The top systemic conditions to keep tabs on through the coming year are: risk trends, the tides of monetary policy and trouble in key trade relationships. All currencies and markets will feel the pinch of these crucial themes, though some more than others.
For the Dollar, weight is a critical factor. The Greenback is the world's most liquid currency by a wide margin and that inevitably has knock-on effect on all other counterparts (not to mention assets traditional priced in the unit). Fed forecasting has been a prominent drive particularly through the final months of 2016 and there is little reason to suspect that relationship to change moving forward. There is a view of economic robustness and speculative advantage in this unique policy bearing. There is also untapped opportunity. While the ICE Dollar Index is at a 14-year high, the market is still not close to pricing in the Fed's own time table to rate hikes. Three hikes have been projected by the central bank and the market is skeptical of two. That leaves bullish and bearish paths moving forward. Further, this will also alter the relationship between currency and sentiment trends. If sentiment cools, the Fed's motivations will be curbed with a subsequent ease on the Dollar. That positive sentiment-Greenback relationship can lead a temporary divergence from the normal haven standing - but not for long.
Meanwhile, the Euro's future has a laundry list of concerns that even its discount may not fully account for. The fallout for Brexit is arguably more intense for this shared currency than it is for the Pound given the reality that this fragile monetary union can face systemic risk as it leads other members to follow suit for their own future and benefit. The UK-EU divorce is perhaps the most obvious connection for the Sterling, but the UK currency's current bearing is already so extreme that it may be very difficult to live up to such crisis-level anticipation. Then there is the Japanese Yen which has its constant connection as a funding currency in the carry trade with competition from the BoJ's intervention effectiveness. We discuss the most important drivers for the majors through 2017 in this recording of Thursday's webinar.
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