Key topics of December in the foreign exchange market

Key topics of December in the foreign exchange market

Key topics of December in the foreign exchange market

The last month of autumn was very full of important events. Market participants focused on the us presidential election, the prospects for monetary policy of the fed and ECB, the dynamics of the commodity market, as well as the devaluation of the yuan.

Going back to the US elections, it is worth emphasizing that their results shocked many investors. Although the favorite of the election race was considered to be the democratic candidate Hillary Clinton, the victory was still won by the Republican candidate Donald trump. Some experts believe that the final rating of Clinton was spoiled by the news that the FBI resumed its investigation against her in the case of the use of personal email for work purposes as Secretary of state. These reports appeared less than two weeks before the election. Although the Clinton campaign staff tried to offset the negative impact of the latest information, it did not change the situation much. However, the day before the election, Clinton was able to increase the gap from trump, which was facilitated by reports that the FBI stopped investigating the case against Clinton and sees no grounds for her criminal prosecution. Data from a survey conducted by the Wall Street Journal and NBC News indicated that the day before the election, Clinton was supported by about 44% of respondents, and trump - almost 40%.

However, the results showed that the election was won by trump - he won 306 electoral College votes with the necessary 270. His main rival, Clinton, received only 232 electoral College votes. However, the vote count indicated that Clinton was ahead of trump by 2.1 million votes. Candidates scored 64,433,399 and 62,337,643 respectively. It should be emphasized that the results of the last election are the fifth time in the history of the United States when a candidate who received more votes in the country as a whole loses the presidential election.

If we talk about the impact of trump's victory on financial markets, the initial reaction was a large - scale fall in the US dollar against major currencies-the Euro rose by almost 300 points, while the rates of safe-haven currencies such as the yen and the franc rose by more than 400 points and almost 300 points, respectively. However, after a while, the exchange rates of these currencies began to actively decline against the backdrop of threats of intervention from Central Banks, as well as conciliatory statements by the newly elected President trump, which forced some analysts to reconsider their opinion and calmed the financial markets. Recall that during his election campaign, trump promised to break or renegotiate trade agreements. Experts also feared that the US economic course would become less predictable, given trump's radical ideas on issues such as trade, immigration and military strategy.

Currently, it is expected that trump's economic policy may lead to increased budget spending and accelerated inflation. Investors are also hoping for faster growth in the US economy, easier regulation in the health and financial sector.

In General, trump's victory in the presidential election was extremely favorable for the us currency-recently, the DXY index, which shows the ratio of the us dollar to a basket of six major currencies, rose to a 14-year high, and exceeded the mark of 102.0.

In addition, the election results, along with statements from fed representatives, significantly increased the chances of the fed raising the interest rate in the near future. According to the futures market, the probability of the fed tightening monetary policy in December is now 96.3%, compared with 78.0% at the beginning of this month and 60% in early October.

Recall that the President of the Federal reserve of Richmond Lacker said that the arguments in favor of raising rates are "quite strong". He did not comment directly on the election results, but said that fiscal stimulus would allow rates to be raised at a faster pace. However, he added that everything will depend on what initiatives will be implemented. Meanwhile, the head of the St. Louis fed, Bullard, said that trump's victory should not force the Central Bank to refuse to raise rates in December. Bullard noted that we should not expect that political changes in Washington will have any impact on monetary policy.

Meanwhile, fed Vice Chairman Fischer noted that the Central Bank is approaching an increase in interest rates, but did not specify when it expects the next increase. "The fed's rate hike means growth in the US economy, which will be a boon for the whole world. At the same time, a gradual tightening of monetary policy will reduce the potential negative consequences for other world economies," the fed Vice Chairman explained.

Another argument in favor of raising the rate was the minutes of the fed's November meeting. Fed officials said that rate hikes are likely to occur relatively soon if incoming data continues to indicate an improvement in the economy. Some Central Bank officials directly called for a tightening of monetary policy in December.

Fed chief Yellen also confirmed that the fed will raise the rate relatively soon if the data indicates an improvement in labor market conditions and inflation. She pointed out that at the meeting in November, it was concluded that the arguments in favor of raising the rate are getting stronger.

Recent events have also had a positive impact on US stock indexes, which have reached historic highs. Trump's election has supported demand for stocks whose dynamics strongly correlate with the Forex economic cycle, especially the securities of manufacturing companies that were affected earlier this year. Bank stocks also rose strongly as investors look to ease restrictions and increase inflation. Summing up the results of the month, it is worth noting that the Dow Jones index rose by 5.4%, the S&P 500 - by 3.8%, and the NASDAQ - by 3.9%.

The market's focus was also on the ECB's monetary policy Outlook. Earlier this month, ECB President Draghi noted that the recovery of the Euro zone economy is still highly dependent on the Central Bank's stimulus measures. Such statements suggest that the ECB will extend its quantitative easing program at the December meeting. "We can't let our guard down now. So far, we do not see any stable signs of strengthening of the underlying price dynamics. The ECB will continue to act using all available instruments until inflation continues to grow steadily, " Draghi explained. Meanwhile, the minutes of the ECB's last meeting indicated that policymakers assume December will be a key month for the future course of policy. There was also evidence of concern about the decline in wage growth, which suggests further easing. The results of the latest Reuters poll showed that more than 80 percent of economists who voiced their forecasts for the ECB's December meeting believe that the most likely scenario is to extend the duration of the quantitative easing ( QE) program, which should end at the end of March 2017. Several respondents said that the ECB could expand the monthly volume of the QE program from the current 80 billion. Euro or change the composition of the assets that it buys. Only one economist said that the ECB will not make any changes to the parameters of its monetary policy.

In General, the increased probability of a fed rate hike and speculation about further easing of the ECB's policy brought back to life the topic of divergence in monetary policy in the US and Europe. From this point of view, the prospects for the Euro do not look rosy. One of Goldman Sachs ' best trading ideas for 2017 suggests a drop in EUR / USD to $1.00 in the next 12 months. Meanwhile, Societe Generale experts expect EUR / USD to return to parity in the 1st quarter of 2017.

An important topic in November was also the situation on the oil and gold markets. Since the beginning of the month, WTI crude has fallen by almost 3.3%, while the price of Brent crude has fallen by about 2%.

The reason for this dynamic was the strengthening of the dollar, the continuing oversupply, as well as uncertainty around the upcoming OPEC meeting, at which a decision may be made to reduce production. Recall that at the end of September, at an informal meeting in Algeria, OPEC agreed to limit production in the range of 32.5-33 million barrels per day, but there are no agreements on specific limits for each of the countries yet. The final decision on the agreement should be made at the OPEC meeting on November 30 in Vienna. Most analysts warn that if OPEC does not reach an agreement, oil prices will fall rapidly.

As for gold, at the end of November, the precious metal prices fell by almost 6.6%, reaching a 9-month low. The main factors driving down prices were increased expectations of a fed interest rate hike in December, increased risk appetite, and the strengthening of the us currency. It should be emphasized that an increase in rates is likely to cause a strengthening of the dollar, which is unfavorable for gold. In addition, this metal does not generate interest, and it is harder to compete with other assets that generate income when rates rise.

Another important event was the depreciation of the Chinese yuan. Since the beginning of November, the yuan has fallen 1.8% against the us dollar, setting a new 8-year low, and recording the largest drop since August 2015. The decline in the yuan accelerated after trump's victory in the US election, which increased expectations of more aggressive actions by the fed to curb inflation, which in turn led to a rise in the dollar. Experts believe that when the USD/CNY pair is trading near 70000, the markets will consider that the fall of the yuan is over.

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