With Inauguration Day upon us, the US dollar retreated from earlier highs on Donald Trump’s recent call for a more competitive greenback. As the world’s sole reserve currency, when the dollar goes, so does the rest of the world. In our new series, we look at how post-election forex challenges could affect dollar-based corporate payments and transfers in the months ahead.
This is a busy holiday-shortened week for capital markets. Today, U.S banks will be closed in observance of Martin Luther King Day.
On Tuesday, U.K’s PM Theresa May is expected to call on the country’s populace to reject the hostility of the Brexit referendum in a speech that being billed as setting the stage for a “hard” exit from the E.U. The pound’s plummet overnight to last Octobers ‘flash’ crash levels (-1.6% to £1.1987) seems to have got ahead of her.
The defining moment of the week for the USD came as the first press conference of the President-elect Donald Trump unfolded. Few details on topics the market cared like infrastructure spending or fiscal stimulus were shared while the most combative aspects of his campaign were in full view. Inauguration on Friday, January 20 starts the countdown for the first 100 days of the Trump era that is expected to deliver bold action that could see the USD appreciate across the board.
Last Friday’s U.S. December employment increased less than expected (+156k vs. +176k), but the markets interpretation in a rebound in wages (+0.4% m/m) suggests a sustained labor market momentum that sets up the domestic economy for stronger growth and further interest rate increases from the Fed in 2017.
Fed minutes released yesterday revealed that apart from a unanimous agreement to raise interest rates for the first time in a decade last month, the committee expressed concerns as to the results of future Trump policies, with a view to maintain a “wait-and-see approach.”
For capital markets, the month of December was dogged by thin holiday trading as global equity indexes marched within striking distances of new records, the dollar ending the year losing some of its shine as dealers closed their books despite global yields floating atop of their year highs.
However, two unexpected major events dominated trading in 2016 –
The USD is higher across the board after the Fed finally announced its much awaited rate hike. The market had already priced in the 25 basis points rate hike to the Fed funds rate, but the hawkish tone of the FOMC statement, dot plot and Fed Chair Janet Yellen’s press conference have boosted the USD and solidified the strong dollar rally. Improving U.S. economic conditions were cited and the expectation now is of at least 3 rate hikes in 2017. The effect of those improved forecasts have been felt around the globe.
The Fed did not surprise, they did what was expected of them on the headline, but it’s their foresight that has capital markets wildly gyrating.
The big takeaway from yesterday’s FOMC meeting is the increase in the pace of tightening that’s been signaled for next year. Policy members voted unanimously to raise its target for the fed funds rate up +0.25% to +0.5%- 0.75%.
On the calendar front this is a busy week in capital markets.
The Fed is expected to increase fed funds for the first time in 12-months. On Wednesday, the FOMC will issue both its policy statement and quarterly forecasts while Janet Yellen will take questions that will bridge “present policy with pending stimulus” under the Trump administration.
In the weeks after the U.S. election, Mexico’s peso took a hit over uncertainty about the country’s relationship with key trade partners--especially its northern neighbor. This could be a good time for financial professionals at multinationals exposed to the peso to assess exchange rate risk as it relates to payments and transfer activity. We examine the currency’s recent volatility and offers suggestions to better manage payments in the face of these uncertainties.