Financial market participants were getting back to their desks this week and gearing up for what promises to be a very interesting year. Taking a look at where we ended the year with currency valuations says a lot about the factors we see driving valuations going forward. 

After the election in November, we saw a strong uptick in equities and bond yields, which led the U.S. dollar in a late-year rally. The one major exception was the Brazilian real, which gained more than 24 percent against the dollar on expectations of a positive change in government and investor sentiment. 

Outside of Brazil however, the dollar ended the year mixed against many other major currencies: Up by 3 percent against the euro and down by about 4 percent to the Canadian dollar, with most other major currencies in between.

There were two big losers in 2016.

  • Brexit took the British pound down, with the currency ending the year 16 percent off against the U.S. dollar.
  • This week, the Mexican peso hit another all-time low. That added to its 16.5 percent drop during 2016, which of course has been attributed to the rise of Donald Trump and his presidential victory. 

As we get going in 2017, the financial world has set expectations for strong growth in the U.S., along with more protectionism. Europe expects a difficult Brexit process and contentious elections.

My View: The two dominant questions as we start 2017 are:

  1. When will markets experience a reality check on their high expectations for the year?
  2. How will the first few days and weeks of a Trump presidency play out? 

The U.S. economy is definitely set to continue improving – and likely would have no matter who was elected. But the hopes for late ‘90s style growth are, to use the immortal words of former Federal Reserve Chairman Alan Greenspan, “irrational exuberance.”  

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