Tomorrow we will examine the year as a whole in our 2017 review webinar, yesterday we looked at the big consensus calls for 2017 and how those early forecasts played out. Let’s now look at how this translated into price movement over the year, starting with which currency performed best and worst.
Best Performing Currency: Euro
The winner is actually the Euro, which rose by 12% against the US Dollar, despite bearish predictions at the start of the year. So, what was behind the Euro’s bumper year?
At the start of the year, the market was highly concerned that EUR was going to come under significant selling pressure due to the elevated uncertainty around the Eurozone elections. The prospect of far-right, anti-Euro parties gaining power in the eurozone led many to believe that EUR would trade lower over the year. However, as it quickly became clear that these parties would not gain power and the political status quo was reaffirmed, the market was able to return to concentrating on core fundamentals, which turned increasingly more positive for the single currency.
Data strength over the year continued to fly in the face of those who forecast the Euro would fall lower, and the message from the ECB became increasingly more constructive. The bank was widely expected to announce tapering during the summer, in line with various ECB comments and firm data. However, the ECB kept policy unchanged over the summer and instead signalled that it would discuss the issue of tapering at its Autumn meeting. The ECB did indeed announce tapering at its Autumn meeting although the level (a reduction of 30 billion EUR a month) undershot market expectations somewhat. Especially as it was also announced that the duration of the program would be extended in line with a “lower for longer approach” which, Draghi said, is necessary to maintain the sustainability of growth in the Eurozone.
The final piece of the puzzle for the Euro was the under performance of the US Dollar over the year. With Trump’s failure to deliver any meaningful policy changes, especially the lack of infrastructure spending, the US Dollar sank lower over the year. The Fed stayed on the side lines right up until this month, as data over the first half of the year showed inflation undershooting expectations for five consecutive months.
With all of these factors working together EUR enjoyed a solid gain over the year and is in a great position heading into 2018.
Cryptos Creating Noise
While EUR was the best performer of the traditional G10 currencies, no discussion on currency performance this year would be complete without talking about Bitcoin. The explosion in popularity and price of this digital currency has been one of the biggest news stories of the year, and it seems that every person is now talking about Bitcoin.
Source: CoinDesk – https://www.coindesk.com/
Sitting at just under $19,000, Bitcoin has risen nearly 1,900% this year in moves which haven’t been seen since the tech bubble of 2001. Surging popularity, increased usage and adoption by businesses have transformed Bitcoin from an underground currency, maligned by governments, into a real contender, challenging the role of traditional currencies. Indeed, the entire cryptocurrency space has been blowing up this year with many other smaller cryptos experiencing even bigger gains. Ethereum, which is the second highest traded crypto, has risen an incredible 8,673% this year, while Litecoin has also exploded 7,144%.
Worst performing Currency: US Dollar
The worst performing currency of the year actually turned out to be the US Dollar which, is especially ironic given that the major consensus call for 2017 was that the Dollar would explode. A combination of Trump’s failure to deliver meaningful policy adjustment, along with the Fed’s cautious approach over the year, saw traders unwinding the large USD long position that had built up around the beginning of 2017.
With inflation falling below forecast for 5 consecutive months over the middle of the year, the Fed back peddled on earlier Hawkishness and instead moved firmly to sidelines while they waited for inflation to pick up again. The Fed’s neutrality was amplified, given that other G10 central banks were taking a hawkish turn with the BOC and BOE raising rates and the ECB announcing tapering. Indeed, the Fed’s rate rise this month has also failed to create any USD upside as the projected rate path for next year has remained unchanged. Many are taking as a sign of the Fed’s uncertainty which increase the likelihood that the Fed will keep rates at current levels for longer than expected next year.