This year has been very interesting in the currency markets and certainly did not fail to deliver its share of surprises.
We have experienced some extremes, from the dramatic rise of bitcoin, to the full-blown collapse of the bolivar in Venezuela.
As the year draws to a close, I've singled out some of the winners and losers, and the key factors that could shape currency markets going forward.
One of the surprises of the year has been the lacklustre performance of the US dollar.
The widely followed US Dollar Index, (which is the US dollar weighted against a basket of currencies DXY) is down 9.27 per cent year to date, despite their central bank being the first to have consistently increased interest rates during the year.
The euro defied expectations, with year to date gains of 13.14 per cent against the US dollar when many investment banks were calling for a move to parity (or beyond) for the single currency versus the dollar.
We have seen the euro gaining across most of its trading partners, shrugging off election fears but ending with little change when compared against a resilient British pound.
The British pound has rebounded strongly in 2017, up 9.14 per cent against the US dollar and up 9.91 per cent versus the New Zealand dollar, as the market reprices the pound following its Brexit sell off.
It is becoming clear that the United Kingdom will not be falling off a cliff, as many predicted ahead of the vote.
The decision to exit the restrictive economic arrangement may well pay dividends going forward.
Locally, our NZ dollar struggled through what was an eventful year, which brought a change in Government, while our agricultural sector experienced mixed results.
While relatively unchanged against the USD, we are ending the year lower against all our major trading partners, down 6.43 per cent versus the Australian dollar, down 13.7 per cent versus the euro and down 4.59 per cent versus the Japanese yen. The declining currency was supportive to exporters while increasing import costs such as energy.
A currency is a unit of account, and is divisible, which bitcoin satisfies but falters at present when it comes to being a medium of exchange.
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These moves pale in comparison to the crypto currency space, with bitcoin up a phenomenal 1185 per cent for the year to date. Whether bitcoin should be included as currency, a form of money, or neither, is being hotly debated around the world.
A currency is a unit of account, and is divisible, which bitcoin satisfies but falters at present when it comes to being a medium of exchange. Importantly, the key function of money is to act as a store of value over time, such as gold.
Many would argue that paper currencies controlled by central banks are no longer a store of value, actively pursuing devaluation of 2 per cent per year, which is true and in part why bitcoin was developed, but the truth is bitcoin is currently neither a currency nor money. Gold is up 11.58 per cent in terms of NZ dollar and 9.85 per cent in terms of US dollar.
Factors that could shape 2018
Most commodity markets bottomed in 2015/16 and we are currently experiencing a cyclical upturn in commodities. This could be supportive to commodity-based currencies.
We have seen many of the more influential central banks like the Bank of England, US Fed and European Central Bank start to unwind the support given to financial markets at the onset of the global financial crisis in 2008.
Expectations are for these banks to continue tightening in 2018. These first movers in tightening may see their currencies rise against those countries still in need of accommodative policies and interest rates.
Our Reserve Bank has signalled that it may cut rates if needed, which could see the kiwi dollar continue to struggle in 2018. Factors such as a decline in dairy, slowing house prices and elevated personal debt levels are headwinds they are looking to steer the economy through.
We could see our domestic environment of slow but steady economic growth continue in 2018, while external shocks from geopolitical conflicts or financial shocks are the potential wild cards that could potentially heighten volatility in the new year.
*Price comparisons as at 6th December 2017
• Sheldon Slabbert is a Sales Trader at CMC Markets Auckland