My Currency Overview for 2017 (And How You Can Profit From It)

Jarratt Davis

Special Consultant to the FPA
The start of a New Year can be a great time to take a step back, look at the big picture and ensure you’re fully aware of the events that will dominate the next 12 months. When it comes to successful Forex trading, preparation really is everything. This is especially true when following my methodology of trading the fundamentals. In this article, I want to give you my currency overview for 2017 – and where the respective central banks will be focusing their monetary policy.

My Currency Overview for 2017: Brexit & Trump Will Dominate
Before we move onto exploring the individual currencies and central banks, it’s important to highlight the two political events which will continue to drive market sentiment in 2017. For me, Brexit negotiations and Donald Trump’s first 100 days as president will be the most significant events.

However, there are other geopolitical events that could shake the markets. An example of this is Russia. It’s going to be incredibly interesting to monitor the actions from the Kremlin in light of their alleged cyber-attack on the US. The extent of hacking is difficult to verify. Should malware be found within private US firms and financial institutions on a large-scale, I think it could lead to some noticeable market volatility.

US Dollar (USD)
The Federal Reserve has recently hiked rates to 0.75%. So can we expect further increases during 2017? Well, I’m fairly confident that Donald Trump’s election victory make further US interest rates more likely.

But it’s not just my instinct which is giving me this feeling, it’s the behaviour of investors and where they are moving their capital. Since Donald Trump’s election, global bonds have lost over £1 trillion in value during a significant investor sell-off.

They’ve started moving their capital into equities. They believe that Trump will create a domestic framework which is very pro-business.

Investors think Trump will implement inflationary policies, increasing the chances of interest rates rising. However, this all depends heavily on the kind of trading arrangements he can secure with partners in North America and beyond. An insular America which starts trade wars could have an adverse impact on US employment and business spending. This will reduce the likelihood of a rate rise in 2017. What’s my currency overview for 2017? All things considered, I’m expecting the USD to sustain its strength well into 2017.

Pound Sterling (GBP)
The full effect of Brexit has yet to unfold. Early 2017 will very much be dominated by the timing of Article 50 being triggered. Subsequent negotiations with the EU will also be influential. Expectations for any immediate easing by the Bank of England have diminished.This is because the UK economy continue to show resilience following the Brexit vote

Considering the Bank of England’s increasing concerns over inflation, there is currently no clear bias in regards to future monetary policy expectations. Risks to the UK economy remain to the downside, with the UK/EU negotiations likely to play a pivotal role once underway. Inflation data should be watched very closely and poses a significant risk to my current view. That’s my currency overview for 2017 for the pound.

Euro (EUR)
My fundamental bearish bias for the euro has increased. This is due to the ECB extending its QE programme and presenting a dovish tone at their December meeting.

I expect the euro to remain pressured for the foreseeable future. There are a few primary reasons for this. The first is that employment in the Eurozone has decreased to its lowest level in seven years. (9.8% for October 2016.) The second is the stability of the European Union following Brexit. My feeling is that the UK referendum and subsequent negotiations will give rise to nationalist sentiment spreading across other EU countries such as France, Italy and the Netherlands.

Yen (JPY)
What’s my currency overview for 2017 for Japan? The Bank of Japan is currently pursuing a programme of QQE (Quantitative & Qualitative Easing). This is in an effort to kick-start economic growth. At its December 2016 meeting, the central bank didn’t alter its course of action. It left excess reserves interest rates at -0.10%.

One concern that BOJ board members do have centres around the profitability and stability of Japanese financial institutions because of low-interest rates. Therefore this is what I’ll be monitoring throughout 2017. But for now, the central bank’s QQE programme looks set to continue at an annual rate 80 trillion yen.

Although fundamentally JPY is a bearish currency as inflation falls, it will continue to remain attractive as a safe-haven currency during 2017. It will, therefore, strengthen during times of uncertainty/risk-off sentiment.

Canadian Dollar (CAD)
At its most recent meeting in December, the Bank of Canada left its key interest rate unchanged. I expected this. Also, with employment and inflation within forecasts, we can expect monetary policy to hold steady.

Having said that – this could be an interesting year for Canada depending on what their neighbours south of the border decide to do. If Trump decides to drastically cut business tax rates in the US, this could hurt the Canadian economy and its ability to attract investments. How the US will renegotiate key trade deals will also be of great importance. Watch this space!

With the above in mind, I expect oil prices to remain the primary driver of CAD in 2017. Remember, oil is a key source of economic growth and income for the Canadian economy. Strength in oil prices should see CAD remain supported. Weakness in oil prices should pressure the CAD.

Australian Dollar (AUD)
In 2016, the Reserve Bank of Australia cut interest rates twice in an attempt to encourage lending and spark economic growth. Following this easing, the central bank held interest rates at its last meeting of 2016 in December.

So how does this affect my currency overview for 2017?

My feeling is that the Reserve Bank of Australia will hold its rates during 2017. The economy shrank by 0.5% in the third quarter of 2016 – the largest retraction for some years. As such, I expect continued weakness in the Australian Dollar for the foreseeable future.

Putting This Analysis To Work
So you be wondering why my currency overview for 2017 is important to you. m You might be asking: ‘how can I use this analysis within my trading?’. Well, the secret really is in preparation and being aware of key risk events.

Let’s take a look at USD as an example. We know there’s a fairly good chance that the Fed will increase interest rates this year. So the first thing we need to do is make a note of the dates when the Fed will meet to make a decision. Below are the 2017 meeting dates for the FOMC:

January/February: 31-1
March: 14-15
May: 2-3
June: 13-14
July: 25-26
September: 19-20
October/November: 31-1
December: 12-13

The date that stands out to me is the FOMC’s March meeting. This will be the first point of the year where the Fed Chair will speak to the press and summarise the performance of the US economy. If the US economy is still performing steady, with an increased rate of inflation, I’d expect an interest rate rise in the near future. This would strengthen USD in the long-term.

What’s interesting is that this meeting could come just before Britain triggers Article 50 at the end of March. In my mind, this will hurt the price of the pound. If the above scenario plays out, going short on GBP/USD could be a viable trade to take.

Join My Facebook Group
To see this kind of thinking in action and to read more of my currency overview for 2017, join my new Facebook Group. It’s a vibrant community of Forex traders that all want to improve their profitability. Within this community, I regularly share some specific trading insights that you can follow. I’ll also share student case studies and Facebook Live broadcasts. It’s completely free to join this group – and it’s something I would encourage every serious Forex trader to do.