For our final installment of Global Perspectives in 2017, we are taking a look ahead to 2018.
Looking first at the U.S. dollar, we do not expect a great deal of movement next year. If we had to choose a direction, we would expect the dollar to be a little weaker in 2018, as much of the positive news on the U.S. monetary policy front has been already been discounted.
Next, let's go around the globe - starting with North America. Now that the U.S. tax reform plan has crossed the finish line, the major question from a global perspective is that of “repatriation." The theory is that if U.S. companies holding profits outside the country get tax relief to repatriate those funds, the U.S. dollar will strengthen. So far, the markets seem to have decided that such appreciation will not be very significant. That could be because many such profits are actually already held in U.S. dollars.
On the NAFTA trade deal, we anticipate a resolution in 2018. Last year at this time, we thought NAFTA would be renegotiated. But due to several really difficult sessions this year, there's a sense among observers that the negotiations may wind up failing and NAFTA could be significantly changed or even fall apart.
Meanwhile in Europe, we see some potential upside with the euro and other European currencies as corporate earnings in that region are higher than in the U.S., adding to a stronger international growth story. The European Central Bank's monetary policy has not gained any more attention as that body continues to wait for the fallout from their unconventional policy measures. The sticky point in the eurozone is how to stimulate its economy further with no single fiscal policy. This remains an unresolved structural weakness in that region.
For the British pound sterling, we believe it will be sideways, given the Brexit negotiation uncertainty. The Bank of England's monetary policy does not necessarily reflect economic strength, so the market may not react to any possible changes there.
Going to Asia, Japan has also exhausted its monetary policy means and the key goal of “Abenomics" - the monetary policy of Prime Minister Shinzo Abe - is to try stimulating the economy with structural reforms, particularly in the labor market.
China is entering a new era after its 19th Communist Party Congress in October solidified the rule of President Xi Jinping. The country's economy is moving toward a minor recovery.
If there is a pattern emerging here it is that monetary policy seems to be taking a back seat on the global economic front. The primary mover of global markets in 2018, as we see it, will be fiscal and trade policy. That encompasses things like tax reform, Brexit negotiations and potential infrastructure spending projects in the U.S.
Here's a more detailed look at our 2018 forecast for major world currencies.
Global Perspectives will be on hiatus next week, so from all of us here at City National Foreign Exchange, we wish you a wonderful holiday season and a safe and Happy New Year.
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