Chart of the Month
Speculative positioning towards the Euro has risen to a six year high as growth gathers momentum, political headwinds dissipate and there is increasing talk of tapering central bank bond purchases.
Sentiment on the common currency has shifted dramatically over the past few months. Growth has surprised even the optimists and outpaced the US so far this year. Last month’s election of Macron as French President and Merkel’s large lead in the polls has reduced the political risk premium that investors had placed on the region earlier this year. Whether the ECB actually tapers this year or in early 2018 is still open to debate. In the meantime, the June policy statement is likely to sweep away the soft language the ECB has deployed until now, even as growth dynamics improve. Expect the Euro to head higher from here on.
For some countries, particularly small island economies, the tourism industry assumes huge significance, and Iceland is an extraordinary example of this. Following the global financial crisis, the Icelandic government made a concerted attempt to boost tourism as an offset to the disastrous performance of its financial sector. The results have been spectacular: doubling the number of tourists from 600 thousand in 2012, to 1.3 million in 2015. Reykjavik airport welcomed 40% more passengers in 2016 than 2015! The fifty percent fall in the Icelandic Krona in 2008 made the country more affordable, but the currency has been one of the stronger ones in recent years – thanks in part to tourism.
The US Dollar index has an uncanny tendency to change course shortly after a new president is elected, as illustrated in the chart. The late-year surge in the trade weighted US Dollar index was a continuation of the existing trend, attributed to very positive expectations that Donald Trump will deliver faster growth and prosperity by cutting corporate tax rates, reducing regulation and providing a fiscal boost. However, these high hopes are already deflating, and with them the president’s approval ratings, casting doubt on the bullish Dollar consensus. The risk of a market disappointment is running high as the president has already depleted his modest arsenal of political capital. To the extent that the administration lacks the ability to implement its policies, the disillusionment of middle America will reinforce a stagflationary outcome in 2017-18.
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