FX Monthly Outlook: Outliers and Opportunities

 |  September 08, 2017

“...Autonomy, complexity and a connection between effort and reward are, most people will agree, the three qualities that work has to have if it is to be satisfying,” says Malcom Gladwell in his bestseller Outliers: The Story of Success.

Gladwell’s insights on outliers are certainly on display in the foreign exchange markets as mostly autonomous participants attempt to navigate major geo-political posturing (again), interpret ambiguous economic news and begin the sprint towards the end of the year — all while not losing money.

But as Gladwell points out, success can be elusive. As most of the world’s central banks come up to full steam following a very quiet August, the potential for outlier events — and the resulting volatility/opportunity this affords in the markets — is significantly increased.

August 2017 Spot Returns Chart

What happened

The U.S. dollar headed for its longest monthly losing streak in 14 years.1 Hurricane Harvey took America’s fourth-largest city — and its energy pride land — offline with millions displaced and hundreds of billions of dollars in property damage inflicted.

North Korea dashed global hopes for a general cooling of tensions in East Asia by firing yet another missile, but this time went so far as to fly it directly over Japan.

Gold became the key outlier as it rallied past $1,300 per ounce — the highest since the U.S. presidential election in November.

Fed chair Janet Yellen fought off executive jawboning on two fronts at her speech in Jackson Hole by reminding listeners that post Lehman-crash rules were put in place for a reason — and that the pace of rate rises and asset unwinding should be handled based on quiet, predictable data rather than executive perceptions of what the economy requires.

President Trump announced that tax reform would now be his administration’s key initiative, citing major support in both parties.

The International Monetary Fund warned China that its use of massive debt issuance to fuel growth since the 2008 crash may reduce Beijing’s ‘fiscal space’ to intercede in a fresh crisis.2

What’s in play

Washington watchers are following every move Congress makes around taxes. But, FX markets are skeptical of its chances of success. Should this push gather steam, an opportunity to benefit from a historically weak USD would be obvious to exporters clued in to the connection between effort and reward that Gladwell points out.

Central Bankers will be reviewing a host of economic data released in early September to begin determining and deploying strategies to protect their respective countries.

Japan warned the United Kingdom about the continued dangers of Brexit negotiations in regards to hurting trade between the two nations. Japan also dashed British hopes of negotiating a quick trade deal by flatly stating that negotiating with Brussels was the priority at the moment as Britain determines its future.3

Janet Yellen’s term is up for renewal in February. If her recent Wyoming speech was not appreciated at the White House, the market is betting that Gary Cohn succeeds her.

What’s next

Outlier events to watch out for include: specific reactions to North Korea’s latest moves, Russian aggression in the Baltic and European Central Bank President Mario Draghi’s barely veiled attack on what he perceives as President Trump’s flawed trade protectionism.

The rumblings for Catalan independence are expected to go down in flames again — especially on the back of the recent terror attacks in Barcelona. But a new referendum with similar aims in Northern Iraq could threaten to further destabilize a still-reeling, war-torn Middle East.4

The major outlier is China’s five-year Communist Party Congress to be held in early October. If President Xi Jinping is unable to further consolidate power through his ‘prosperity and control’ mantra during the meetings, all bets are off on China’s ability to navigate the potential fallout from its $28 trillion-dollar debt pile.5

Standard attention getters will be key economic data releases for the U.S., China, Japan, the U.K. and the EU during the first week of September — and further shocks to oil.

If any of these items move from outlier to the front pages, it is highly likely FX markets will move wildly.

A strategic approach to managing currency risk

While a natural reaction to potentially disruptive events can sometimes be despair and retreat, we recommend a more strategic approach: allow the fear to pass and look for strategic moves that can help shield your company from the forces of world financial markets.

Our FX Specialists are here to help — with ideas and strategies to effectively protect your business. Contact us today

Learn more

1, 2, 3: Financial Times
4: Wall Street Journal
5: Bloomberg

This article is intended for US audiences only.

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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

Nate Wyne is the Southern California foreign exchange advisor for Silicon Valley Bank. Nate hold a bachelor’s degree from the University of Utah in International Studies for Business. Nate partners with his clients to create and implement sound risk-management practices around foreign exchange and cash-management. After completing his undergraduate degree, Nate pursued a career in retail banking before moving to commercial and eventually corporate banking. With 13 years of banking experience across the full gamut of advisory roles – Nate enjoys helping growing businesses focus on what they do best.
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