Most economists were very pessimistic about the prospects for the UK following Britain’s decision to leave the European Union on 23rd June last year – none more so than Mark Carney and his team at the Bank of England who quickly responded by cutting interest rates and increasing the scope of the Bank’s asset purchase programme.
In reality, the UK economy showed remarkable resilience during the second half of 2016, defying the bearish expectations to top the table as the fastest growing economy within the G7 last year. Retail sales have shown the consumer remains in good health, aided by low unemployment and steady wage growth. Meanwhile, sentiment surveys suggest that businesses in both the manufacturing and service sectors of the economy remain optimistic about the months ahead and the FTSE 250 index has gained more than 20% since its slump on 24th June.
In response, those commentators who were particularly bearish...
The past few months have seen political turmoil on several fronts causing sharp moves in currency markets. Brexit in the UK drove the value of sterling to a 30 year low against the dollar, the election of Donald Trump in the US caused the Mexican peso to depreciate 10% in a week and growing political nationalism has sparked the theme of Eurozone break-up risk to repeatedly rear its head. With this in mind, it is worth attempting to quantify exactly how risky FX markets are today and whether recent moves have priced Options out of the FX hedging toolkit.
To begin, we look at a long-term chart of implied volatility in four major currency pairs. This measure is derived from the Options market and indicates the forward-looking risk expectation of market participants in terms of volatility. It is a key driver of Option prices and therefore a good indication of how...
“Germany…continues to exploit other countries in the EU as well as the US with an implicit Deutsche Mark that is grossly undervalued.”
Head of the National Trade Council, Trump Trade Advisor
“The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position”
German Finance Minister
President Trump and his advisors know how to provoke a reaction, and their recent accusations of currency manipulation have generated indignant responses from the so-called global elite. However, a sober assessment of actual merits of these accusations show that there may be more to this issue than simple baiting and bombast on the part of an aggressive US administration.
The problem for both Trump and for those he accuses (specifically China, Japan and Germany) is that it is very hard to prove either FX market intervention or the absence of intervention. Those who do intervene will rarely admit it (with some...