2016 Review: The year of the impossible
It’s a year polling organisations and the establishment would rather forget. The two shock events, which will reverberate for decades to come, is the decision by British voters to leave the EU on June 23 and for the US electorate to choose Donald Trump on November 8, a billionaire real estate developer and populist, as their 45th President.
In the forex markets GBP crashed, one of its biggest moves in history, the Bank of England cut interest rates by 0.25% and restarted quantitative easing, and the USD soared and safe-haven currencies such as JPY plunged and gold also lost its lustre as markets anticipated faster economic growth and more inflation. Indeed, Trump proved far more effective at driving down the value of JPY than the Bank of Japan ever did, even with its heroic efforts at devaluation.
Those two events have caused a sea change in thinking by investors and traders as they fled government bonds and piled into equities and rediscovered commodities.
Governments take over from central banks
Also, markets now see governments, particularly in the US and Japan and to a lesser extent the UK, taking over from central banks in terms of stimulating economic growth.
But before Trump even takes over the Presidency, US economic growth was already picking up, especially in Q4, and unemployment carried on falling. And the US Federal Reserve only did one interest rate rise despite indicating more of them.
Meanwhile, on the political front the prospect of the troubled EU and Eurozone breaking up looked more likely than ever, although it will probably just escape that fate in 2017.
Basically, the enormous political will to hold it together is melting away as populist political parties surge often with anti-EU, anti-immigrant and anti-austerity agendas. Indeed, the decision by Angela Merkel, Germany’s chancellor, to invite massive uncontrolled migration from the Middle East and Africa, against a backdrop of terror attacks across Europe, did little to build trust in the establishment or belief in EU principles such as the free movement of people, but was a huge boost for anti-establishment anti-EU parties. This was merely reinforced by the UK’s Brexit decision.
Europe’s political leaders will spend 2017 and beyond dealing with the consequences of such policies along with their increasingly hated austerity measures, which have particularly afflicted the southern countries.
Meanwhile, Italy once again emerged as one of the potential future flash points for the Eurozone as Italian voters rejected constitutional reforms to ditch the unpopular President, Matteo Renzi. In the meantime, the country is grappling with a banking crisis, which could be close to being tackled, but likely at the expense of yet more public debt, for an already very heavily indebted country.
Towards the end of the year, the election of Trump along with growing concerns about the Eurozone’s future and an extension of quantitative easing by the ECB, which have morphed from economic to political, saw the EUR at very depressed levels.
Other big events of the year included the meltdown in Chinese stock markets at the beginning of the year and ongoing efforts by the Chinese government to rein in rampant speculation and corruption while shifting the economy away from exports towards consumption driven growth.
While this was occurring CNY steadily lost ground to the USD, and proxy currencies, such as AUD saw plenty of volatility, plunging on China’s stock market troubles early in the year before recovering. Also, some commodity currencies have been helped by the steady recovery in commodity prices over the course of 2016 culminating with OPEC and Russia agreeing to cut oil supplies in late November, which sent oil prices over $55 / barrel. It just remains to be seen if discipline will prevail and whether US frackers undermine the supply balance by pumping out more oil in response to higher prices.
By Justin Pugsley, Market Analyst, MahiFX