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BUSINESSES SHOULD BE PREPARED FOR SIX DRIVERS OF FX VOLATILITY IN 2018

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BUSINESSES SHOULD BE PREPARED FOR SIX DRIVERS OF FX VOLATILITY IN 2018

Uncertainty in the political and economic landscape was the story of 2017 and this unpredictability doesn’t look set to change for the year ahead. With a number of significant events outlined for 2018 that are highly likely to influence financial markets around the globe, one foreign exchange (FX) company has warned businesses to be prepared for further turbulence during the next 12 months.

Trump coming into power and his actions since, the triggering of Article 50 and subsequent divorce proceedings as the UK exits the European Union (EU), and elections in Europe, all caused substantial volatility in currency markets last year.

Noting the devastating effects currency market instability can have on businesses’ bottom lines, Godi Financial has highlighted six key drivers of FX volatility in 2018. The leading financial firm is warning companies of the need to act now to implement a FX strategy that will safeguard against monetary losses in the face of unpredictable currency markets caused by the following factors:

Ongoing UK Brexit negotiations

Brexit negotiations are the obvious point that could cause much anguish in currency markets. Throughout 2018 there will be plenty of twists and turns as more details become clear on the UK’s exit from the EU. If talks stutter, or indeed come to a standstill, another UK election wouldn’t be out of the realms of possibilities, which could itself have major implications for the UK and Brexit outlook.

Some of the UK’s leading business groups are still calling on Prime Minister Theresa May to agree a Brexit transition deal in a bid to avoid a hard Brexit. Many businesses will turn to contingency plans early this year and prepare for a bleak business outlook if an agreement isn’t reached soon. Recent reports claim the UK government is looking to negotiate a Brexit transitional arrangement but the continuing uncertainty may not only weaken sterling, but damage any optimism amongst British businesses. The Bank of England (BoE) reflects this, noting that a hard Brexit could see the UK lose tens of thousands of jobs, particularly in the financial services sector.

Germany coalition talks

Germany’s Chancellor Angela Merkel is currently in talks with the country’s second largest political party, the Social Democrats (SPD), as she attempts to form a new coalition government and end Germany’s political deadlock. The talks come following the general election three months ago where Merkel’s party was the largest, but without a majority vote.

Immigration has been highlighted as a key obstacle of the talks but Merkel has claimed she is optimistic about the discussions, which are expected to continue until the end of this week.

A new coalition government is unlikely to be formed before the end of the first quarter and if talks break down and a deal is not reached, another election is expected. This uncertainty in the political arena of the largest economy of the euro zone will cause concern in financial markets, with an unstable German government sending ripples through the euro zone.

Italian election

Italy’s next general election is set for no later than spring 2018 and there is concern that a Euro-sceptic government could emerge. Such a result would cause political unrest, which could feed into the financial system and leave poor business sentiment.

The election follows a cycle of votes across Europe, where the general picture has been one of winners that sit on the right of the political scale. Opinion polls have given a nod to this European trend, as well as regional elections in Sicily, where the centre-right were victorious and provided an important measurement of voters’ intentions. However the centre-right is unlikely to gain an outright majority in the general election and so an alliance would need to be formed, which could mean coalition partners from the left. How stable such an outcome would be is questionable.

Whatever the outcome, Italy’s banking woes persist due to non-performing loans and undercapitalisation, so fingers will still point to Italian banking instability, and this can’t be ignored.

North American Free Trade Agreement (NAFTA)

US President Donald Trump is continuing to stand firm on his new and controversial proposals for the North American Free Trade Agreement (NAFTA). Canada and Mexico – two of the US’s major export markets – are making no signs of accepting the proposals, which are said to lead to a rebalanced and modernised agreement.

The Trump administration’s apparent willingness to pull out of NAFTA if serious concessions aren’t made is viewed as a significant blow to the US economy and could even prompt a recession. The cancellation of NAFTA would also mean major damage to automobile companies such as Ford and GM, tech companies like Cisco and Microsoft, as well as agriculture businesses.

Talks currently appear to be making little progress and negotiations will likely drag on through early 2018, creating more uncertainty as to the outcome.

Developments in China

In early December, the State Council Information Office told Reuters that China’s economic growth target for this year will represent new changes in the economy as the government places more prominence on higher quality development. It has been noted that China’s leaders will probably maintain 2017s growth target of approximately 6.5 per cent this year, despite risks associated with its very high amount of debt.

If there is a slide in financial growth, it may cause pain and uncertainty not just for China, but for the global market. That said, it is predicted that any changes shall be gradual, but it’s always worth keeping on the radar.

Global geopolitical tensions

Defence was stepped up during the latter part of 2017 by Nordic countries in reaction to Russia’s increased military activity. As well as the Nordic countries, tensions also exist between Russia and Turkey, Syria and Ukraine, and this will continue to be in focus in 2018. Russian sanctions could be tightened as a result and may well add fuel to the fire.

Strains between North Korea, the US and China could deepen if North Korea continues with its aggressive missile test program, with the risk of a nuclear war being a major concern if it comes to breaking point.

Middle Eastern relations are also still in the spotlight. If the deep rooted tensions between Iran and Saudi Arabia intensified, there could be disruption to energy exports out of the Middle East and oil prices could be impacted. Unease amongst Israel, Lebanon, Syria, Turkey and Iraq could have further implications. These geopolitical risks may hurt financial market sentiment, and could subsequently spark volatility in an array of currency markets.

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Global stocks slide on inflation fears, dollar gains

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Global stocks slide on inflation fears, dollar gains 1

By Herbert Lash

NEW YORK (Reuters) – The Nasdaq recovered as the bond rout retreated on Friday, but most other equity markets swooned around the world as data showing a strong rebound in U.S. consumer spending kept fears of rising inflation alive.

Shares of Amazon.com Inc, Microsoft Corp and Alphabet Inc edged up after bearing the brunt of this week’s downdraft to help the Nasdaq shake off its worst day in almost four months on Thursday.

The Nasdaq Composite advanced 0.56% while the S&P 500 slipped 0.48% after a late-session surge failed to hold. The Dow Jones Industrial Average fell 1.51%.

U.S. consumer spending rose by the most in seven months in January as low-income households got more pandemic relief money and new COVID-19 infections dropped, setting up the U.S. economy for faster growth ahead.

The benchmark 10-year Treasury note on Thursday shot to a one-year high of 1.614%, a move that rocked world markets. The note’s yield is up more than 50 basis points this year and is now close to the dividend return of S&P 500 stocks.

Yields on the 10-year note fell steadily throughout the session to trade 11.7 basis points lower at 1.3981%.

The amount of money swirling through markets and U.S. stocks at close to all-time highs has caused investor angst, said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.

“Many people are taking some profits and not necessarily reinvesting that money quite yet,” Kinahan said.

“The U.S. equity market is still the best game in terms of safety versus opportunity. But there is a shift going on.”

The scale of the recent Treasury sell-off prompted Australia’s central bank to launch a surprise bond-buying operation to try to stanch the bleeding.

MSCI’s benchmark for global equity markets slid 1.61% to 656.29 despite its large weighting to the U.S. tech heavyweights.

In Europe, the broad FTSEurofirst 300 index closed down 1.64% at 1,559.48. Technology stocks lost the most as they continued to retreat from 20-year highs.

The dollar rose against most major currencies as U.S. government bond yields held near one-year highs and riskier currencies such as the Aussie dollar weakened.

The dollar index rose 0.683%, with the euro down 0.9% to $1.2066. The Japanese yen weakened 0.31% versus the greenback at 106.55 per dollar.

Gold fell more than 2% to an eight-month low, as the stronger dollar and rising Treasury yields hammered bullion and helped it post its worst month since November 2016.

U.S. gold futures settled 2.6% lower at $1,728.80 an ounce.

Benchmark German government bond yields fell for the first time in three sessions but were still headed for their biggest monthly jump in three years after rising inflation expectations triggered a sell-off.

The 10-year German bund note fell 1.2 basis points to -0.271%.

European Central Bank executive board member Isabel Schnabel reiterated on Friday that changes in nominal interest rates had to be monitored closely.

Copper recoiled after touching successive multi-year peaks in six consecutive sessions, falling more than 3% as risk-off sentiment hit wider financial markets after a spike in bond yields.

Three-month copper on the London Metal Exchange (LME) slumped to $9,112 a tonne.

MSCI’s emerging markets equity index slumped 3.36%, its biggest daily drop since markets plunged in March.

The surge in Treasury yields caused ructions in emerging markets, which feared the better returns on offer in the United States might attract funds away.

Currencies favored for leveraged carry trades all suffered, including the Brazil real and Turkish lira, which slid for a fifth straight day, erasing all the year’s gains.

The heaviest selling earlier was in Asia, with MSCI’s broadest index of Asia-Pacific shares outside Japan sliding more than 3% to a one-month low, its steepest one-day percentage loss since the market rout in late March.

Oil fell. Brent crude futures settled down 75 cents at $66.13 a barrel. U.S. crude futures fell $2.03 to settle at $61.50 a barrel.

(Reporting by Herbert Lash in New York; Additional reporting by Tom Arnold in London, Wayne Cole and Swati Pandey in Sydney; Editing by Nick Zieminski and Matthew Lewis)

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Dollar gains on higher yields, risky currencies weaken

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Dollar gains on higher yields, risky currencies weaken 2

By Karen Brettell

NEW YORK (Reuters) – The U.S. dollar gained on Friday as U.S. government bond yields held near one-year highs, while riskier currencies such as the Aussie dollar weakened.

Yields have surged as an acceleration in the pace of vaccinations globally and optimism over improving global growth bolster bets that inflation will rise. That has also led investors to price in earlier monetary tightening than the Federal Reserve and other central banks have signaled.

The dollar move is “a function of what’s happening on the yields side,” said Jeremy Stretch, head of G10 FX strategy at CIBC World Markets. The 10-year yield briefly climbed above the S&P 500 dividend yield on Thursday, he noted, indicating “uncertainty that is writ large.”

The dollar index rose 0.59% to 90.847, its highest level in a week.

It gained against the yen, touching 106.69 for the first time since September.

The benchmark 10-year Treasury yield surged above 1.6% on Thursday for the first time in a year after a weak seven-year note auction. It was last at 1.45%.

U.S. yield increases have accelerated this month as Fed officials refrain from expressing concern about the yield gains.

“The Fed has not really hinted that that’s making them uncomfortable, so the bond market’s going to push that,” said Edward Moya, senior market analyst at OANDA in New York. “That’s really dictating this move in the dollar.”

Riskier currencies retreated. The Aussie fell 1.99% to $0.7713, after topping $0.80 on Thursday for the first time since February of 2018.

Marshall Gittler, head of research at BDSwiss, said the Australian dollar was underperforming despite the market signaling higher growth, likely because the country’s central bank’s yield curve control policy would restrain its bond yields from moving much higher. That, in turn, could limit the attractiveness of the currency.

The greenback is likely to continue to benefit from safe- haven flows if risk appetite continues to worsen, and emerging market currencies may be among the biggest losers.

“There’s a big, big concern that this reflation risk is going to get out of hand and that’s going to really pummel the emerging market currencies, and I think you’re going to see that investors are going to need to reassess their dollar positions,” said Moya.

Data on Friday showed U.S. consumer spending increased by the most in seven months in January, while price pressures were muted.

U.S. jobs data for February released next Friday is the next major economic focus.

Investors are also waiting on details of the U.S. fiscal stimulus bill, which is expected to be passed in the coming weeks.

The Democratic-controlled House of Representatives on Friday was poised to push through President Joe Biden’s $1.9 trillion coronavirus aid package, although it looked unlikely to be able to use the bill to raise the minimum wage nationwide.

The euro dipped 0.79% to $1.2078 after touching a seven-week high of $1.2244 on Thursday.

Bitcoin fell 0.32% to $46,946. Ethereum dropped 0.7% to $1,468.

(Additional reporting by Ritvik Carvalho in London; Editing by Dan Grebler and Andrea Ricci)

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Oil drops on dollar strength and OPEC+ supply expectations

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Oil drops on dollar strength and OPEC+ supply expectations 3

By Jessica Resnick-Ault

NEW YORK (Reuters) – Oil prices fell on Friday as the U.S. dollar rose while forecasts called for crude supply to rise in response to prices climbing above pre-pandemic levels.

Brent crude futures for April, which expire on Friday, fell 74 cents, or 1.1%, to $66.14 a barrel by 12:45 EDT (17:45 GMT). The more actively traded May contract slipped by $1.08 to $65.03.

U.S. West Texas Intermediate (WTI) crude futures dropped $1.42, or 2.2%, to $62.11. The contract was still on track to be up 4.8% on the week.

The U.S. dollar rose as U.S. government bond yields held near one-year highs, making dollar-priced oil more expensive for holders of other currencies.

“It’s a dicey time – it doesn’t seem like a time to load up on a risk-asset position,” said Bob Yawger, director of Energy Futures at Mizuho in New York, wary of a potential output increase from OPEC and allies at next week’s meeting. Also, the U.S. stockpile report this week showed a surprise build in oil inventories.

Friday’s gains also reflect profit-taking after both Brent and WTI headed towards monthly gains of about 20% on supply disruptions in the United States and optimism over demand recovery on the back of COVID-19 vaccination programmes.

Investors are betting that next week’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies, a group known as OPEC+, will result in more supply returning to the market.

U.S. crude production fell in December, the latest month for which data is available, according to a monthly report from the Energy Information Administration.

Despite talk of tightening fundamentals, the demand side of the market is nowhere near warranting current oil price leves, they added.

U.S. crude prices also face pressure from slower refinery demand after several Gulf Coast facilities were shuttered during the winter storm last week.

Refining capacity of about 4 million barrels per day (bpd) remains shut and it could take until March 5 for all capacity to resume, though there is risk of delays, analysts at J.P. Morgan said in a note this week.

(Reporting by Shadia Nasralla, Additional reporting by Sonali Paul in Melbourne and Koustav Samanta in Singapore; Editing by David Goodman, Louise Heavens and David Gregorio)

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