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FX Monthly Outlook: Calm after the Storms

 |  October 04, 2017

It has been over a month since Hurricane Harvey hit Texas and Louisiana with devastating force, but the recovery there is far from over. And the wake of destruction left by Hurricane Irma in Florida and the Caribbean islands, as well as by Hurricane Maria in Puerto Rico is still being assessed. The damage from these record-breaking storms has taken a huge toll on the local communities — and will certainly have an economic impact on the current quarter.

Yet, in spite of these historic storms, capital markets remained relatively calm as investors turned their focus to the Federal Open Market Committee (FOMC) meeting.

Spot Returns (%) - September 2017

What happened?

The Federal Reserve left rates unchanged in the range of 1.00 – 1.25 percent, but paved the way for a hike in December. Committee members cited the expansion of the economy at a moderate pace and the robust labor market. In addition, the FOMC expects to begin reducing its $4.5 trillion balance sheet in October.1

Angela Merkel was re-elected to a fourth term as Chancellor of Germany — Europe’s largest economy. The Chancellor’s Christian Democratic Union party held on to 33 percent of the voting bloc, but the fragmented parliament will be difficult to govern.

The Bank of England left its key interest rate unchanged at 0.25 percent, but alluded to a potential hike in November. Policy members commented that the UK economy continues to strengthen, while the unemployment rate has hit a 42-year low of 4.3 percent. Correspondingly, the pound rallied over 3 percent in September.2

The U.K. House of Commons voted 326 to 290 on legislation that would prepare the U.K. to withdraw from the EU. Prime Minister Theresa May and Conservative Party members said they aren’t willing to give unconditional support to the measure, and that certain changes need to be made before they will back the final bill.3

President Trump signed a bill that would raise the debt ceiling and keep the government open for three months. The bill also included emergency funding for hurricane relief and had majority support from both Senate and House.

What’s in play?

A major plan to overhaul the current tax system was proposed by President Trump. The proposal calls for tax cuts for most Americans by reducing the top income tax rate and lowering corporate and small-business rates. However, critics are saying that it favors businesses and the wealthy and could increase the deficit even further.

Geopolitical tensions stemming from North Korea continue to dominate headlines. Strong statements made by President Trump during his United Nations address and hostile rebuttals from North Korea have kept investors in the region on alert. Traders have been looking for safe haven options as the Japanese yen has floated higher in recent weeks.

Japanese Prime Minister Shinzo Abe asked his cabinet to compile new economic stimulus measures in a package worth around 2 trillion yen ($17.8 billion) by the end of the year. The package is expected to focus on subsidizing education and childcare costs, as well as boosting corporate investments.4

What’s next?

The dollar index bounced up 1.5 percent in September on a bullish tone from the Federal Reserve. The probability of a rate hike in December has climbed from 30 percent to 66 percent on the back of this optimism. The dollar may have found a floor given the latest outlook.5

Central bankers and industry participants will be discussing the practice of ‘last look’ at the Global FX Committee meeting in November. This controversial practice allows banks to pull out of trades at the last minute when the market moves against them. The industry produced the FX Global Code in May and has worked to hammer out standards to reduce misconduct.6

Real GDP advanced 3.1 percent in 2Q, driven by strong inventory buildup and consumption. Looking forward, the destruction caused by Hurricanes Harvey, Irma and Maria will certainly have an impact in 3Q and 4Q, but growth expectation for the second half of 2017 remains positive at 2.5 percent.7

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1, 2, 4, 5: Bloomberg
3, 6, 7: Reuters

This article is intended for U.S. audiences only.

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.

About the Author

Minh Trang is a senior foreign exchange trader. In his previous position at SVB, he worked as a portfolio manager for SVB Asset Management, and has over twelve years of investment experience in fixed income securities. Prior to joining SVB Asset Management, Trang worked on the commercial paper sales and trading desk at Toyota, managing the western region. His experience also includes portfolio management at the Arizona State Treasury, focusing on the state's short-term fixed income investment pools. He started his career as a research analyst for PICO Holdings, a strategic investment company.

Trang earned his Masters in Business Administration at the University of California, Irvine and a bachelor in economics at the University of California, San Diego. He holds the Chartered Financial Analyst (CFA) designation and FINRA securities licenses 7 and 66.
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