The WorldFirst Team take a look at the key currency trends forecasted for the year ahead and consider the many diverse events set to shape global markets in 2018.   

Australian Dollar (AUD)

Forecasts for the Australian economy in 2018 are seemingly positive, driven largely by improving global conditions. Economists are forecasting that the Australian dollar will remain at its current levels for most of 2018, with a hike expected towards the end of the year.

With a diverse and stable commodity base, Australia is heavily reliant on trade for its economic security. The improving global outlook, and demand for commodities, backs Australia’s terms of trade and provides growth opportunities.

Household consumption growth is set to increase slightly this year, however still below the average seen before the global financial crisis. This small pick-up will be supported by stronger growth in employment and the forecasted gradual increase in wage growth, and implies a modest decline in the household saving ratio. The forecast for household income growth represents significant uncertainty for the consumption estimates.

Much like the rest of the developed world, Australia’s concerns arise from a lack of deep and steady growth in wages. The most recent Statement on Monetary Policy from the Reserve Bank of Australia highlighted that while the Australian unemployment rate has fallen from 6.3% to 5.6% since the beginning of 2015, those job gains have been largely made in sectors that are not providing enough wage growth. A lack of wage growth ultimately means a restraint on consumer spending, which makes up roughly 60% of the Australian economy.

Overall, Chinese data is still the most interesting dynamic for the Australian economy. With our expectations of steady, but unimpressive growth here, we believe it is likely that the AUD will trade in a similar manner in 2018.

Great British Pound (GBP)

Before 2017 came to a close, the European Union agreed to move Brexit talks with the UK onto the second phase, with the focus now on trade and a transition pact.

British Prime Minister Theresa May commented, “There is still more to do, but we’re well on the road to delivering a Brexit that will make Britain prosperous, strong and secure”.

Brexit supporters were reassured that Britain’s departure from the EU will certainly happen on March 29, 2019.

We are still unclear, however, as to what trading relationship the UK government ideally wants if Britain is to leave the single market and the customs union.

Aside from Brexit news, the Bank of England raised interest rates in November, more than a decade after the last upward move.

The rise to 0.5% came as the Central Bank sought to dampen inflation, but is controversial as tighter monetary policy could cool the economy. The next decision on interest rates is set for February 2018, but another hike is unlikely according to economists.

According to a recent forecast from PwC, 2018 will see global economic growth pick up to its fastest rate in seven years. At the same time however, the UK’s economy could fall to its weakest expansion since the last recession due to the progress of the Brexit negotiations and wider discussions about the future of the EU.

“As the old song lyric goes ‘nobody said it would be easy’ and GBP’s performance in 2018 is likely to echo such a sentiment. Gains will be sold, losses will be bought and a focus on Westminster will drive the day to day to allow it to continue as the noisiest currency out there”, said Patrick Liddy, Head of Currency at WorldFirst.

US Dollar (USD)

With no apparent movement on the repeal of Obamacare or the building of the infamous wall between the US and Mexico, the Trump Administration managed to advance at least one part of its policy agenda – the Republican tax bill officially became the law of the land on January 1st 2018.

The rest of 2018 will bring about at least two rate hikes economists predict, along with growth in consumer spending and household income, combined with moderating household debt. Federal Reserve Bank of New York President William Dudley commented:

“Consumer spending should continue to grow at a moderate pace, supported by solid fundamentals. Household income is being bolstered by faster compensation growth and continued healthy employment gains. Moreover, the aggregate household balance sheet remains in good shape, due in part to rising home prices, a strong stock market, and only moderate growth in household debt.”

Chatter over a US recession has increased from negligible levels and while conditions are not set for growth to reverse anytime soon, movements in bond markets are suggesting that investors are becoming increasingly cautious over the outlook for the US economy.

2018 is also an election year in the US. This is not at a Presidential level, however, with all 435 seats in the House of Representatives, and 33 of the 100 seats in the Senate, alongside 39 State Governorships are up for grabs.

Legislation has been one way of strangling the Trump administration, however, revoking their hold over both parts of Congress will go some way to stopping his reform agenda.

WorldFirst’s economists think it’s very unlikely that the Democrats will be able to meaningfully change the Senate, however, they need only 25 seats to flip in their favour to take back the House.

Euro (EUR) 

With lots going on in the Eurozone in 2017, it was overall a good performance by the European economy and economists predict this momentum will follow in 2018.

According to the European Commission, the economies of all EU Member States are expected to continue growing throughout 2018.

All eyes will be on the EU as they eagerly await how it functions post-Brexit, along with managing the ongoing Catalonia crisis. German Chancellor Angela Merkel and French President Emmanuel Macron will garner lots of attention as they navigate the Union through this uncertain time.

Additionally, the Eurozone will be occupied with upcoming European Parliamentary elections and the choice of a new European Central Bank president in 2019.

All in all, 2018 is shaping up to be a busy year.

According to Patrick Liddy, there is still a vast amount of slack that needs to be taken up in the Eurozone economy. Unemployment remains at 8.8% against circa 4% in the UK and US – and alongside an unsure inflation outlook, this should allow the European Central Bank to cautiously keep looser monetary policy to stimulate growth this year.

The ECB’s latest policy meeting saw them keep benchmark interest rates unchanged, while they slowed down the pace of their asset purchase program. From January 2018, the ECB will buy €30 billion per month in corporate and government bonds, down from the €60 billion per month they currently buy.

Singapore Dollar (SGD)

Overall 2017 was a strong year for the Singaporean dollar, an extremely positive result considering a real threat of recession was lingering when the year kicked off.

Although growth is forecast to continue in 2018, government economists expect economic expansion to moderate throughout the year. They note we should expect growth of 1.5 to 3.5% for 2018.

Against the greenback, the SGD has surged more than 8% since early 2017, and it is expected to strengthen in the early part of 2018.

Global trade risk will remain in 2018, with President Trump still in the Oval Office.

Patrick Liddy notes, “We entered 2017 pretty downcast, given the election of the 45th President, but his inability to change global trade as he would choose to do has allowed Singapore to outperform the pessimism”.

We think that in light of this, the Monetary Authority of Singapore’s expectations for growth (published back in October 2017) may be slightly too pessimistic and SGD could continue to grind higher through the early part of 2018.

New Zealand Dollar (NZD) 

Over the course of 2017, the NZD was one of the most volatile of the major currencies.

As the Chinese yuan strengthened against the USD, large gains came through for the NZD, with declines spurred on by the uncertainty over Jacinda Adrern’s election to the Prime Ministership. To add to news of Ardern’s win, the recently elected PM is now also expecting her first child, and critics have been quick to raise concerns about her commitment to the high pressure role.  Ardern has fired back and says, “I’ve got work to do to prove that I can fulfil the responsibilities I have, and I absolutely intend to do that and so does the government.”

As the Reserve Bank lowered their growth forecasts and maintained interest rates in their most recent meeting, their forward guidance now projects that its first hike of a new cycle will take place in Q2 2019. The currency also found relief in the Bank’s estimates that the overall impact of the new government’s policy is a positive stimulus to aggregate demand of about 0.5% of GDP.

If the Chinese economy performs as we expect in the coming 12 months then we are optimistic on New Zealand growth and the currency in 2018.

 

 

Disclaimer:
These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgement.
Whilst information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed.
All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.
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