They say a picture is worth a thousand words. So, I will try to give 8,000 words worth of fundamental analysis with 8 charts showing what the key themes for the FX majors are in 2017. We attempt to focus on the most important elements for the world’s most liquid currencies using charts. By keeping tabs on these fundamental themes – and perhaps even their data/visual representations – you will have a better foundation on which to analyze the market moving forward.
Dollar (US) Tied to Monetary Policy and Risk Appetite
The first chart is something of a cheat. It includes two fundamental influences on the Dollar; but as it happens, they are intrinsically related. The candle stick price feed is the DXY Dollar Index while the red line is the implied yield from the December Fed Funds futures contract. Rapidly rising rate forecasts for the FOMC was a key driver through the final months of 2016. This influence will no doubt carry forward, but the central bank’s ability to normalize policy will depend on steady markets. Therefore, if the S&P 500 (blue line) were to falter, implied rate forecasts would slide and therefore so would the Dollar.
Canadian Dollar Still Related to Oil?
For any currency cross, the most liquid and fundamentally motivated component of the pair will win carry most of the influence over the exchange rate’s bearings and pace. For USD/CAD (candle price), the Dollar is clearly the far more liquid counterpart. That said, skew does not distort a clear correlation to US Oil prices (inverted in red) too often. Heading into the end of the year, this relationship saw its largest divergence form the norm in two-and-a-half years. The departure comes under strong motivation, but history says it won’t stray for long – a soaring Dollar impact oil as much as it does USD/CAD. Watch to see when – not if – this relationship snaps back.
Euro (Eurozone) Seeking Safety Inside or Outside the Boarders
There is an existential crisis facing the Eurozone. The scourge of financial crisis has lingered around the region and currency for more than six years now when the debt crisis was detonated by Greece. No lasting solution to the underlying problems have been offered since, and the festering economic and financial issues are leading to deeper discontent. The UK’s decision to leave the EU is in part a side effect of these issues. That divorce has lit the fuse for more destructive developments moving forward. The risk is that other members of the EU – and more critically the EMU that represents the Euro – will decide to leave. That will fundamentally change the position of the Euro in the system for investors, reserves and institutional needs. There are different outlets to watch this risk like sovereign credit risk, but below (in green) is the German Bund yield which is one of the pinnacles of safety for Europe. If demand for Treasuries and foreign credit-equivalent debt outpaces Germany’s it can signal a unique fear.
