As we wind down 2018, we wanted to summarize our thoughts for major currencies in 2019. Currency forecasting is never easy. It is made all the more difficult by an ever more volatile geopolitical environment. And it is even more complicated when there are so many developments in the world that turn out to be more black and white than expected.
The first of these is Brexit. British Prime Minister Theresa May told parliament this week that debate on her Brexit plan will take place the week of January 7, with the vote the following week.
We expect the plan to pass. But if the vote fails there are alternatives, including a possible second referendum or an extension of the deadline for the United Kingdom to leave the EU.
Either way, expect the British pound sterling to be volatile as we kick off the New Year. However, we believe there will be some ultimate resolution that will lead to a higher pound later in the year.
The bottom line: It's clear that Brexit resolution is good for the British pound and Brexit chaos is not.
The euro is similarly caught up in the fate of Brexit, along with a few other landmines that may spice up currency trading. We have talked about Italy during the past couple of months, but France is also coming into play as a potential hot spot. The collective financial sigh of relief at Emmanuel Macron's election just 20 months ago has morphed into a fresh bout of nerves as reality has set in. In recent weeks, France has had demonstrations over Macron's policy proposals, particular over tax structures. That said, the balance of risks seems to be resolvable, and similar to Brexit we think Europe will get through this and see a stronger euro in 2019.
Looking at the future of the Japanese yen and the Chinese yuan, U.S.-China trade negotiations will set the tone. Investors will vote on those risks in some measure via currency valuations. In line with the importance that trade plays in those two economies — particularly in China — any meaningful resolution will likely benefit the Asian currency complex.
We believe that the Chinese Yuan will remain on the weak side due to other factors more specific to China — lower interest rates to stimulate the economy and persistent issues with debt.
Our View: Look for strength in the euro, BPS and yen after the first few months of the year.
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