If 2017 was all about keeping a close eye on outgoing Federal Reserve chair Janet Yellen for clues about US monetary policy moves, 2018 will be about taking a bird's eye view of global growth and how that drives market moves.
Bank analysts at Barclays and Goldman Sachs predict global growth will hit 4% next year –an all-time high since 2011 – with economists at the US bank announcing the outlook is “as good as it gets”.
Daniel Been, ANZ
Currency analysts like Daniel Been, head of FX strategy at Australian bank ANZ, are pinning currency moves to this predicted growth.
Been says: “The key to managing risk in 2018 will be in understanding how aggregate global growth and broad liquidity are evolving and what that means for market volatility, rather than being another year where the slightest nuances in US monetary policy dictate the whole cycle.
"As such, moving into 2018, we think FX markets are highly leveraged to the growth cycle.”
On the back of economic growth, ANZ analysts forecast an appreciation of Asian currencies, supported by continued export momentum in the region and policy normalization in some Asian countries.
ANZ’s top trades include selling the euro and buying Korean won, as well as selling the Singapore dollar and buying the Indian rupee. Strategists at Morgan Stanley also predict that emerging market currencies should strengthen against the US dollar, with the caveat “as long as global growth remains strong”.
Dutch bank ING also predicts a weaker US dollar in 2018 versus emerging market currencies, including the Korean won and Russian ruble.
The foreign exchange industry is set for another introspective year, with the introduction of Markets in Financial Instruments Directive (Mifid) II on January 3 and the roll-out of the code of conduct.
The impact of Mifid II cannot be underestimated, warns Tod Van Name, global head of FX electronic trading at Bloomberg.
“The most significant factor that will affect the FX market in 2018 will be the implementation of Mifid II. This will impact the market in three primary ways – the migration of trading to regulated platforms, the introduction of extensive reporting obligations and an increase in compliance requirements.”
Meanwhile, the much-anticipated global code of conduct for the wholesale foreign exchange market was published in full earlier this year, as a response to misconduct scandals and billion-dollar bank fines from regulators.
The word on the street is that some banks are now tying bonus payments to observance of the new code. Roger Rutherford, chief operating officer at trading platform, ParFX says 2018 will be a key year to redefine the rules in foreign exchange.
Rutherford says: “It is clear that the code is shining a light on areas of the market that have long been overdue for review. Equality, transparency and market conduct have emerged as key industry themes which I feel will continue to dominate discussions over the next year and beyond.”
Principle 17 of the code, which relates to the contentious practice of last look, is under the spotlight and has divided market players. Last look is a practice typically employed by banks to pull a price from a platform, even after a customer has clicked on it and placed its order.
|David Puth, CLS|
The Bank of International Settlements will publish its final guidance on the practice in 2018 via the Global Foreign Exchange Committee.
Meanwhile, settlement utility CLS tells Euromoney of its plans for 2018. Next year it will launch a service that will settle cleared FX with clearing house Eurex, and separately with LCH. In the latter part of 2018, it will launch CLSNow, a bilateral same-day payment-versus-payment gross settlement service. Chief executive officer David Puth says: “This will enable the FX market to move from T+2 to T+0 for five of the world’s leading currencies. We expect this launch to help shape the future of FX markets.”
Next year it will launch a service that will settle cleared FX with clearing house Eurex, and separately with LCH. In the latter part of 2018, it will launch CLSNow, a bilateral same-day payment-versus-payment gross settlement service.
Puth says: “This will enable the FX market to move from T+2 to T+0 for five of the world’s leading currencies. We expect this launch to help shape the future of FX markets.”
However, some remain deeply sceptical as to whether progress in the foreign exchange industry is genuine. Former currency trader and whistleblower Paul Carlier believes the code changes little at best, and sees it as little more than a box-ticking exercise. Senior industry officials praise the code for being backed by central banks as opposed to regulators.
Carlier says: “Central banks, if anything, are subject to more political influence than the regulators. It was after all central banks like the Bank of England [and no doubt others] that appear to have condoned and encouraged the lowballing of Libor [London interbank offered rate],” Carlier says, referring to allegations earlier this year that the central bank pressured UK bankers to keep the rate artificially low.