The most volatile currency pairs in 2017

The election of US President Trump has created major uncertainty surrounding the global outlook on multiple fronts which will have an important impact on currency markets and ensure a high degree of volatility among most pairs. It’s not only Trump, it’s the overall vibe we are getting from politics and foreign affairs across the globe – something big is happening, for good or for worse. We are on the verge of a new era in global economy.

There will be a direct impact from US government actions with uncertainty surrounding the Federal Reserve reaction amplifying price moves as changes in fiscal, monetary and trade policies ripple through the global economy. Given a lack of confidence in the outlook, there are also likely to be frequent and substantial shifts in market sentiment.

US dollar/Mexican peso (USD/MXN)

The election of Trump as US President and a Republican-controlled Congress has created major uncertainty for the Mexican Peso. USD/MXN strengthened to record highs around 22.00 ahead of Trump’s inauguration with the central bank intervening to defend the currency.

Trump has pledged to build a wall on the US/Mexican border to prevent illegal immigration and also stated that the cost of the wall would be paid for by Mexico.

A key policy plank for the Administration is also the bringing of jobs back to the US. In this context, Trump has put strong pressure on companies to increase domestic production within the US and curtail production overseas in countries such as Mexico.  He has also threatened to impose additional tariffs on Mexican goods entering the US.  This policy has had some apparent success with Ford deciding against building a new plant in Mexico.  The House of Representatives has also threatened to impose a border tax which would potentially undermine Mexican exports to the US.

The US President has also pledged to renegotiate NAFTA which is a free-trade agreement between the US, Mexico, and Canada.

Any renegotiation is likely to take years, but policy developments will have an important impact on peso confidence.  There will also be major uncertainty surrounding the Mexican government’s reaction.   

Trade developments will spark further high volatility in the peso with trends in the global economy also important. If confidence recovers, there will be interest in carry trades.

US dollar/ Turkish Lira or Euro/Turkish Lira (USD/TRY or EUR/TRY)

The Turkish lira has remained under pressure this year with a slide of over 8% against the dollar to fresh record lows at the beginning of 2017, as there are major concerns surrounding central bank independence with the government under President Erdogan pressing for a loose monetary policy to boost growth in the economy.

In this context, there are concerns that the central bank will be very reluctant to increase interest rates significantly with the risk that inflation accelerates further.

Turkey is an important geo-political player given its proximity to Syria and ISIS-controlled areas and there remains a persistent risk of currency volatility on security concerns.

Interest rates are high in nominal terms which will maintain the potential for sharp corrective rallies at times.

US Dollar/South African rand (USD/ZAR)

The rand is always prone to high volatility, especially given the importance of precious metals exports. Any strength in commodity prices will put strong upward pressure on the rand, especially if gold prices also maintain a strong trend. In contrast, there will tend to be downward pressure on the rand when commodity prices are weak and the global economy is weaker.

In this context, there will be a high degree of uncertainty surrounding the 2017 outlook as the US Administration takes office. A very protectionist stance from the Trump Administration would undermine confidence in the global growth outlook and also undermine the rand, especially if there is retaliation from China which would fuel concerns over global trade wars.  

There is also a high degree of uncertainty over domestic policies and the position of the Finance Minister with the risk of a credit-rating downgrade which will maintain high volatility, and of course above all the Gupta Leaks corruption affair going on.

Sterling/Australian Dollar (GBP/AUD)

Among the major currency pairs, volatility in GBP/AUD is consistently one of the highest and there is little reason to expect a change in 2017. Sterling came under heavy pressure over the second half of 2016 following the UK vote to leave the EU with Sterling weakening to 31-year lows against the US dollar.  

The Brexit issue will continue to be a major focus during 2017 with the UK government looking to trigger Article 50 and on the verge of a flash re-elections. Even if the timetable is met, uncertainty will continue to trigger high volatility, especially with the Bank of England facing a tough trade-off between growth and inflation.

The Australian dollar remains geared to the value of commodity prices and health in the global economy. There will be a high degree of uncertainty surrounding the global growth outlook following the election of US President Trump. US policies will also have an important effect on the Chinese outlook which will impact the Australian dollar.

US dollar/offshore China yuan (USD/CNH)

US President Trump has threatened to impose tariffs on Chinese exports into the US and pledged to call China a currency manipulator.  If the US does take a tough stance on China, there will inevitably be the threat of retaliation and important damage to bilateral relations as trade fears intensify.

Even if serious tensions can be avoided, China’s party leadership and People’s Bank of China (PBOC) continue to face a major battle in maintaining economic stability and preventing a property crash.

Volatility in the offshore yuan market will be increased by liquidity issues and the potential for a squeeze on positions is a persistent threat as the PBOC looks to curb speculation. There is also the possibility of a one-off yuan devaluation which would trigger a substantial currency move and lead to a big response in the offshore market.

How to stay up to date with the markets and make profit

Sometimes, all you really need to do to make a profit is be alert. Considering the uncertainties and how jumpy the market is, there are many events that can easily trigger a large-scale impact. Brexit is a good example. Once it was announced, the market reacts sharply, but the trend has persisted throughout the next 3 following months. If you were to carry a trade against the Pound after Brexit was announced, you could have done really well. The outcome was rather obvious, it was just the timing that mattered.

If you can understand how news will impact the market (or have done sufficient reason to establish an opinion on the matter), all you need to do is follow the news as they come through. If the outcome was already fully priced into the market, stay out, and if the market was caught by surprise, reacted quickly and forcefully.

Take the UK elections for instance. All you need to do is follow a quick UK elections currency forecast and act quickly if the Labour party wins more seats than anticipated.

Even the great Warren Buffett that he reads the same news and everyone, he just knows how to respond better. That’s all you need to do in times like these.