In their 2018 Currency Outlook report, Tempus, an exchange rate and global payments company, provides a detailed report including the following topics and sections regarding 2017’s economic events and 2018’s outlook:

In Brief

• The Federal Reserve increased interest rates three times, however USD fell 10%
• The Euro surged 15% in spate of political unrest in Europe
• Despite Brexit drama, the pound (GBP) resurged after first have of the year
• Global trade activity resulting in favorable impacts on currencies in emerging markets
• Tech advances and pro-business US government lifted equity indexes to record highs
• The Canadian dollar (CAD) was boosted by 4.8% as a result of the Bank of Canada’s increase on borrowing costs
• Japan enjoyed a seventh consecutive quarter of economic growth, the best streak in 20 years and the JPY was boosted by 3.6%
• GDP growth, lower unemployment and anemic inflation defined the advanced economies
• The Mexican peso (MXN) climbed from its worst levels ever and was the best performer of 2017

Tempus’ View for 2018

• Policy divergence likely to disappear as the driver of USD strength as other central banks gear up to tighten policies
• The Fed’s end to easing measures will test economic stability – fiscal stimulus plays a role with tax reform and government spending
• With sustained accommodative environment, Euro-zone will continue to improve economic situation
• Lack of NAFTA negotiation progress could lead to US abandonment, thus hurting the neighboring currencies
• Discord in the UK between the Conservatives could force out Theresa May and bring in a pro-European Union’s Labour Party
• Heated Brexit negotiations continue in effort to mediate a new trade deal
• USD will face challenges in a steady global economy

In Focus

USD has it worst year in a decade according the Bloomberg Dollar Spot Index

• A 30% USD recovery since 2013 was partially erased
• “Trump Trade”, effects of rises across markets based on business optimism came to a halt

The View – USD may be in for a tough year if risk-appetite remains

• Economists observe that we may be experiencing a market bubble as it relates to equities, cryptocurrencies, unprecedented deflationary pressures and overblow asset valuation.
• The new administration in 2017 anticipated revamping the political system to promote economic advancement to promote globalization, however not much progress has been made for large infrastructure expenditures.
• US tax code changes may only incentivize companies to focus on share value, not hiring or re-investing, as was the goal of the tax-reform legislation.
• To end the year, USD sank to lowest level in ten months.
• Fed chairwoman, Yellen leaves office with what she assessed as a steady economy with low unemployment, but inflation is under the Fed’s desired level.
• Jerome Powell becomes the new Fed chairman and it’s anticipated that Fed will rely heavily on data to understand the low inflation rate, in spite of low unemployment.
• Global economy is set to expand 4% in 2018.
• Efforts by EU, Japan and the US to address China’s trade abuse and excess capacity will threaten current trading terms.

The View – Euro grows strong with dovish taper

• The EU remains strong with its currency attached to the world economy even throughout elections in France, the Netherlands and Germany that featured anti-establishment candidates.
• The Euro did not fall anywhere close to parity as predicted by many financial institutions based on the elections and unrest in Europe.
• The Euro improved by over 10% in 2017 and was the second best performer against the USD.
• Long-term stability in Euro-zone still faces risks, most notably from disagreements in Germany, as the Alternative for Germany (AfG) won 13% of German’s parliament seats.
• The Euro may continue to sway as EU countries (Italy, Spain) deal with separatist elements.

The View – The GBP does not fall regardless of Brexit turmoil

• The GBP rose by over 7% in 2017, in spite of confusion over political parties’ goals.
• A possible 2018 snap election could change the UK’s position if the Labour party outnumbers Conservatives and could uplift a new head of power with a contrasting vision.
• A study shows that British workers will likely lose .5% in real wages as a result of separation from the EU.
• The consumer price index is growing at 3.1% annually where as wages are growing at 2.5% in the UK.
• Fear that not reaching a trade deal in the UK within the next two years would pose a risk of the UK losing 5% of economic growth, where as the EU would only lose .7% plagues the British economy.

The View – The yen met expectation of equities boom

• The yen (JPY) surged by 4.4% in spite of anticipated depreciating of the JPY based on tremendous performance of the equity markets.
• The Japanese economy grew quarterly, as easing measures implemented over the last few years yielded results.
• Japanese GDP projections were upgrade to 1.9% and consumer price index stayed at .7%, however, it is anticipated that the JPY will remain in the low 100s with the potential to return as a safe-haven.

The View – Mexican peso and Canadian dollar beat estimates

• Threats to NAFTA did little to deter appreciation of the MXN and CAD and central banks increased rates of these petro-currencies.
• The effects of the American recovery from the credit crunch helped initiate positive trends in Canada and Mexico.
• Canada’s central bank hiked its benchmark rate twice in 2017, as the economy experienced its best year in a decade.
• Mexico’s central bank increased interest rates to deal with grown inflation and economic activity.
• Household spending in Canada reached 3.3%, the first time in five years that the pace was above 3%
• It is anticipated that NAFTA is in danger as U.S. negotiators aim to change terms or create an entire new trade agreement.

IBC Members can download the complete Currency Outlook from the members-only section of the IBC website under the Special Reports section.  IBC membership is free for all regular IHA members – to learn more and to join, visit the IBC membership information page.