A look back at 2017


 

After another year dominated by political uncertainty in Europe and changes in monetary policy across the globe, we shouldn’t be too surprised that the currency markets look very different to how they did this time last year. In traditional fashion, we take this opportunity to look back at how our forecasts fared in 2017 before looking ahead to what we might expect from 2018 in next week’s report.

 

 

GBPUSD

 

Our bullish call for GBPUSD in 2017 was by and large a good one. Despite the political uncertainty in the UK created by the snap election and the ongoing Brexit negotiations, the pound had a very good year against the dollar, advancing more than 10%. As expected, the Fed raised interest rates by 75bp (+25bp in March, +25bp in June and +25bp in December). However, the fact that the last hike was delayed until December and the rhetoric was less hawkish than expected resulted in the dollar coming under pressure against all its major counterparts.

 

In contrast, the pound received a boost after the Bank of England reversed its post Brexit rate cut and hiked rates by 25bp in November. At the start of 2017, the market wasn’t expecting a rate hike until well into 2019 so the move was seen as a big vote of confidence for the UK economy despite continued uncertainty surrounding Brexit.

 

GBPUSD

Q1 2017

Q2 2017

Q4 2017

Consensus

1.22

1.21

1.25

Validus

1.21

1.25

1.30

Actual

1.24

1.30

1.35

 

While the pound remains around 8% undervalued against the dollar (using a PPP metric), the recent recovery means that the current divergence from fair value is by no means extreme. We’ll discuss what this now means for our 2018 outlook in next week’s report. 

 

 

EURUSD

 

The euro ended 2016 under heavy pressure against the dollar and we expected this theme to continue into 2017. Our expectation was that diverging monetary policy and heightened political risks in Europe would continue to weigh on the single currency while Trump’s spending plans would boost US economic growth.

 

EURUSD

Q1 2017

Q2 2017

Q4 2017

Consensus

1.04

1.03

1.06

Validus

1.05

1.03

0.90

Actual

1.06

1.14

1.20

 

In practice, Rutte’s victory in the Dutch election in March, followed by Macron’s victory in the French election in June helped ease fears that the growing populist vote would spell the end of the European Union. Meanwhile, signs of recovery in the Eurozone economy and talk of tighter monetary policy going forward gave the euro a fresh tailwind.

 

This prompted us to review and ultimately change our bearish call in June to a bullish one for the second half of 2017. The switch proved to be a good move as we saw EURUSD advance from $1.11 to close 2017 at $1.20.  

 

 

GBPEUR

 

As highlighted above, our forecast for a weaker euro throughout 2017 amid increased political uncertainty and diverging monetary policy proved incorrect. Macron’s victory in the French election was seen as a vote of confidence in the Eurozone project while signs of economic recovery helped fuel expectations that the ECB would start to pair back its ultra-loose stance on monetary policy as we head into 2018.

 

Meanwhile, political uncertainty in the UK following Theresa May’s snap election and ongoing uncertainty about Brexit negotiations weighed on the pound. While the Bank of England raised interest rates in November, the committee is expected to maintain a cautious stance on monetary policy going forward and the market is not pricing in another hike until August 2018.   

 

GBPEUR

Q1 2017

Q2 2017

Q4 2017

Consensus

1.18

1.18

1.16

Validus

1.15

1.21

1.44

Actual

1.17

1.14

1.13

 

We switched our stance in favour of a more neutral outlook following the French election and sterling promptly ended the year marginally weaker against the euro.

 

 

USDCAD

 

Reflecting back on Jan 2, 2017, and our call of the trajectory of USDCAD, we have to face up to the fact that it wasn’t our finest call.  We had very strong conviction that the divergent monetary policy paths of the US Federal Reserve and the Bank of Canada, coupled with the protectionist bent of the newly elected US President, would provide significant headwinds for the Canadian dollar, and push USDCAD up to 1.40 by year end, from the 1.3275 Jan 2nd level.

 

Instead what we saw were strong tailwinds for CAD from:

 

 

So while our forecasts looked good at the end of Q1, and we were basking in the warm glow of our prognostications when the market hit 1.3750 in May, as the year progressed our call became colder than a Canadian winter!

 

USDCAD

Q1 2017

Q2 2017

Q4 2017

Consensus

1.35

1.36

1.36

Validus

1.35

1.37

1.40

Actual

1.34

1.30

1.26

 

We will now focus on the available data, current market prices, and our outlook on the relevant economies, to assess our outlook for 2018 in time for next week’s report. Watch this space!



 

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