Foreign exchange market was extremely volatile in 2016 - Natixis

Nordine NAAM, Research Analyst at Natixis, notes that the foreign exchange market was extremely volatile in 2016 because of the escalation of political risks and, generally, the surge in populist movements (Brexit, US presidential election, etc.).

Key Quotes

“The market remained largely under the influence of the US dollar, hence indirectly expectations concerning the Federal Reserve’s policy. For the market, this was a year of two halves. The US dollar weakened sharply in the first six months on concerns of a sharp slowdown in US growth triggered by the emerging crisis in January-February and then the Brexit vote in June. It went on to appreciate as US growth picked up and after Donald Trump’s victory. Most of the gains clocked up by the US dollar came in the second half because of heightened expectations of a tightening by the Federal Reserve.”

“Over 2016 as a whole, the nominal effective exchange rate (NEER) for the US dollar (i.e. measured against the currencies of the country’s trading partners, weighted by reference to exports) appreciated by almost 5%. As regards G10 currencies, the sharpest corrections against the US dollar were recorded by sterling (-16.7%) and the Swedish krona (-7.5%), to a lesser extent by the euro (-3.6%). As measured by its nominal effective exchange rate, the euro held relatively stable in 2016. It is sterling that recorded the sharpest decline in its nominal effective exchange rate in 2016 following the Brexit vote. The Swedish krona was penalised by the Riksbank’s ultra-accommodating monetary policy, which kept track with the European Central Bank’s own monetary policy.”

“Despite the US dollar’s rebound in the second half, G10 commodity currencies (Norwegian krone, and Canadian, New Zealand and Australian dollars) managed to appreciate (in terms of total returns), spurred by the upturn in commodity prices. Even though the Japanese yen has weakened considerably since Donald Trump’s victory at the start of November, it has recorded one of the best performances since the start of 2016 given the weakness of the greenback and the surge in global risks over much of the year. Finally, the Swiss franc weakened against the US dollar in the face of repeated interventions by the Swiss National Bank, but the currency’s nominal effective exchange rate was stable.”