2016 came with a buffet of shocks – many of them coming from the political, rather than economic, arena. Foreign exchange market volatility in the major currencies has risen sharply following these shocks and seems likely to remain elevated through the first months of the New Year.
The outcome may resonate with currency markets for some time. Currency markets are likely to remain vulnerable on the back of shifting policy risks as market participants assess the outlook for the newly elected US administration.
INDIA – India’s demonetization initiative is causing uncertainty and placing the rupee under depreciating pressure. Given the current interest rates experts expect the exchange rate to rise by 6% compared to current levels by December 2017.
Understand that currency fluctuation depends on the demand and supply of that currency in the market. Suppose the RBI reduces the interest rate, the supply of Indian Rupee in the market increases and with respect to US Dollar, there is more of it available. The Rupee then depreciates in comparison to US Dollar. Similarly, from a demand perspective, if the demand for Indian Rupee keeps going up (that is Americans are buying a lot of Indian goods for which they require Indian Rupees), the price of Indian Rupee will appreciate in comparison to US Dollar. Why so? Because currency also faces scarcity constraints and since demand rises and currency remains finite, to accommodate the latest dynamics, equilibrium point goes up resulting in new increased price of INR compared to US Dollar.
In our case, the panic hasn’t caused people to sell Indian Rupee in panic, unlike what happened in the case of Brexit (where people panicked and started selling Pounds, increasing its supply in the market and making its value depreciate). That is why you see there hasn’t been any significant change in the INR to USD rate.
If for some reason there would be a shortage of Indian Rupee in the market, you can expect prices to rise compared to USD for the reasons mentioned above.
The USD has risen broadly since November 8th; the Mexican peso (MXN) has “declined by 14% versus the USD” in spot terms over that time frame and is one of the worst-performing major currencies.
The Canadian dollar’s (CAD) is one of the better performing currencies since the US election. We think the CAD remains at risk of weakening versus the USD moving into 2017, however. The CAD is likely to be sensitive to the trade and border rhetoric of the new US administration. Experts expect USDCAD to rise to 1.40 through the middle of the coming year.
The euro (EUR) is responding to a scenario shaped by growth and interest rate differentials that experts expect will result in a decline in Euro by the end of the year
The pound (GBP) is vulnerable to a yet undefined “Brexit” process. The UK economy has held up relatively well in the aftermath of the UK referendum, obviating the need for additional monetary easing from the Bank of England – for now. Experts think the GBP is liable to remain at least until there is clarity on the EU exit mechanism. Experts expect GBPUSD to ease to 1.20 through mid-2017.
CHINA – The Chinese yuan (CNY) remains under weakening pressure on the back of persistent capital flows out of China.
TURKEY – The TRY has steadily decreased in recent months. The weakening trend has been driven by political concerns following the July 15th failed coup as well as fears that Turkey’s economic performance is waning
Thai Baht – The THB has weakened recently amid portfolio outflows. While external factors will remain dominant in local FX market, one cannot ignore the impact of domestic political conditions. A smooth process of Crown Prince Maha Vajiralongkorn ascending the throne would be modestly supportive of the THB, experts expect.
2016 had its share of setbacks, one only hopes that 2017 brings peace, prosperity, and stability to this fragile world.