By the end of 2017, the world economy appeared to be strengthening after a long period of stagnation, with global economic growth at almost 3%. This was the highest since 2011. With nearly two-thirds of the world’s countries experiencing stronger growth in 2017, the labor market indicators pointed towards a steady growth rate of 3% and above in 2018, according to a report by the United Nations.
While we still have some months more to ascertain the validity of the above prediction, we can still analyze the highs and lows of the forex markets, so far in 2018. The year has been tumultuous, with a significant increase in volatility across the world markets.
Tighter Restrictions Led to Huge Volatility
In January 2018, MiFID II came into force, tightening regulations for retail forex brokers. The new rules, which aimed to create a transparent environment for traders ensuring only legitimate and capable businesses served investors, let to a considerable increase in trade volumes in the FX markets.
People found it easier to trust electronic trading platforms and opened new accounts. By February 2018, trade volume had increased to 14%, crossing the $2.054 trillion market capitalization reached in January. This was also partly due to the depreciating US Dollar in the first few months of 2018, combined with the ECB hinting at stricter monetary policies in the Euro Zone in the coming months.
Federal Reserve Interest Rate Hike and More
The US Dollar made a considerable recovery, as the US Federal Reserve increased interest rates by almost 25 basis points, as expected, in June 2018. This was also due to the dovish outlook of both the European Central Bank and China. The President of the ECB, Mario Draghi, announced that Europe’s quantitative easing programme would soon end in December 2018, and the interest rates would remain unchanged for the first few months of 2019. As a result, the euro plunged to its lowest since the Brexit vote.
Matters were not helped by the Bank of Japan, which also decided to quit its quantitative easing stance and further downgraded its assessment of inflation. China did not raise its borrowing costs after the interest rate hike by the Federal Reserve. Also, with the US tariff threats, the Shanghai Composite Index dropped to its lowest since 2016.
The US Global Trade War
On March 23, 2018, US President Donald Trump announced a 25% tariff on steel imports and 10% on aluminum imports. Initially aimed at China, by May 2018, these tariffs were extended to other countries like Canada, the EU, and Mexico, sparking a global trade war. This, in turn, led to a massive appreciation in the US Dollar and depreciation of other currencies, including the Canadian Dollar, Mexican peso and Japanese yen.
During the last months of 2018 and into the beginning of 2019, the US Dollar is expected to depreciate against global currencies, in the wake of retaliatory tariffs.
Trade tariffs will affect the US manufacturing industry, agriculture, and even micro-breweries, due to increased importation costs. Retaliatory tariffs by the EU would change US$7.5 billion worth of US exports, right from motorcycles to Apple’s shares. If China decides to sell off the $1.17 trillion in US treasury bonds that it holds, it could significantly damage the US economy.
What to Look for in the Last Months of 2018?
Subdued industrial production in China has led to slower growth for the World GDP in Q3 2018. Now, with Democrats gaining control of the US House of Representatives, there might be some changes in the USMCA and NAFTA deals. On the other side of the world, the risk of the UK leaving the EU without an agreement in the Brexit negotiations grows with each passing day. It is vital for traders to remain vigilant about the markets now.