SVB FX Monthly Outlook: Populism Marches on Rome

Throughout October politicians, central bankers and investors ran for cover, then mostly brooded over the growing threat of populism around the world. While the world watches the U.S. presidential election on November 8, the Italian vote on constitutional reform on December 4 has, arguably, far greater implications for the future of the global economy.

Currency markets are jumpy, and traders are currently betting 9 to 1 on a Clinton presidency. Specific Electoral College analysis strongly favors the former secretary of state, while national polls suggest a narrowing of the Clinton advantage. Such times of great uncertainty can lead to increased risk as well as opportunity in the foreign exchange market.

Spot Return Chart 10.31

The Fed chose to keep monetary policy unchanged - again. But they indicated a December rate hike is likely. Market odds for a December rate hike are 72%, up from 52% a month ago.

The looming threat of testy Brexit negotiations between the UK and Brussels did little to dispel strong growth in the British economy. While the GBP did weaken compared to the USD, unemployment, earnings, and especially housing all surprised markets solidly to the upside. Expect the GBP in particular to appreciate against the Euro after the US election fades from the limelight and Italy moves to center stage.

The Great White North (aka Canada) warned about serious overheating in its real estate market. With OPEC’s failure explained below, the vultures are circling the Loonie, so expect it to weaken against the other G10 currencies.

The Bank of Japan continued to do nothing as BOJ Governor Kuroda’s duel against inflation enters its fourth year with neither side letting up. This, despite tripling the amount of cash in the Japanese banking sector to more than 400 trillion Yen ($3.8T worth).1 Given the Italian vote and the GBP’s post-Brexit wounds, Japan’s place as a safe haven currency for the frightened is mostly assured. Expect the JPY to remain strong.

Switzerland’s place as a reserve currency will likely be enhanced over the next few months as its government announced a surprise $2.2B surplus after previously predicting a small deficit.2 Given that Switzerland imposes negative interest rates (currently -0.75%), Swiss taxpayers have been filing advance taxes in droves––further boosting the tax haul. While SVB always applauds innovation, this result seems anathema to any person who pays taxes.

OPEC’s bully pronouncements about a return to high-value oil back in September proved to be short-lived as tensions among member nations resulted in Russia flatly refusing to commit to any production cuts.3 Commodity currencies like CAD, BRL, and MXN will likely weaken as a result.

The World Trade Organization and International Monetary Fund report global trade fell in Q2 2016 by 0.8%. The US in particular saw the total value of American exports fall by $200 billionthe first time since the end of WW II that trade fell during an economic growth cycle. Policy wonks cite the continuing pressure by the populace to ensure trade agreements are reworked towards national interest seems to be playing an outsized role in the drop off.

The rise of strong men and the election of powerful women in the West, like Merkel, May, and probably Clinton, have introduced a fear of change in the global economy. Non-allies of the West are pushing a rhetoric of weakness and indecisiveness among the G10 to consolidate their holds on power. Nationalism is being openly invoked in Russia, China, Turkey, the Philippines, and the US as a cure-all for ills ranging from economic inequality to stagflation to territorial disputes.

Italy’s Prime Minister has vowed to resign from office if his constituents vote down his proposed constitutional reforms on December 4, like former UK Prime Minister David Cameron before him. Using the UK as an example: if the reforms fails, it’s rational to expect that Italian opposition parties would grab power and call for an Italian ‘Itexit’, with Spain not far behind.

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1. The Wall Street Journal, 11/01/16
2. Financial Times, 10/26/16, Switzerland enjoys negative interest rates windfall
3. The Wall Street Journal, 10/29/16

This article is intended for US audiences only.

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.


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