John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 27 December 2017 at 8:00 GMT

Five things to know about 2017: Forex

Your Next Trade
  • EUR, MXN exceeded expectations in 2017
  • Yuan 'far and away' the most overvalued currency
  • US bond market in focus for January

Five things
What were the year's key FX events? Photo: Shutterstock What was the biggest event of 2017?

John J. Hardy: It was a rather quiet year in overall FX volatility terms, but the EURUSD rally from early January through mid-September was the most notable trend of the year – most of it resulting from a strong euro rather than an especially weak US dollar. 

The key event within that trend was the result of the first round of the French presidential election in April, which saw a big gap higher of around 2% once it became clear that Marine Le Pen had no chance of becoming France’s next president – thus avoiding another existential crisis for the European Union.

TF: What was the biggest non-event?

JH: That’s a tough one, but certainly the greatest non-event in forex relative to expectations or fears was the MXN implications of President Trump assuming office. After all, Mexico's currency had devalued for much of 2016 and took a steep dive after the Trump victory. 

Traders taking a long MXN position on the day of Trump’s inauguration were rewarded with enormous gains in the ensuing months, as USDMXN dropped from around 22 to as low as 17.50 over the summer.

TF: What was the year’s most overvalued asset?

JH: The USD was overvalued coming into the year, but was relatively unchanged against a number of currencies by late in the year. Far and away the most overvalued currency remains the Chinese yuan, but it appears that China is not interested in allowing it to devalue. How will Beijing tackle its deleveraging needs without weakening its currency in 2018 and beyond?

TF: What was the year’s most undervalued asset?

JH: We already have talked about the Mexican peso, which started the year at very cheap levels and returned closer to fair value by mid-year. If we want to talk about what currencies are nearing the end of the year at very undervalued levels, we would have to point to the Japanese yen, though it was even cheaper back in 2014 and 2015 due to Bank of Japan policy radicalism. 

More undervalued relative to so-called fair value metrics and recent price history are the two Scandies, the Norwegian krone and the Swedish krona, both of which are at extremely cheap levels relative to historic norms.

TF: What’s the next major thing on the calendar? 

JH: The first of the year often sees the unleashing of big new moves as investors put their ideas to work with a clean profit and loss statement. So regardless of events, the rolling of the calendar can often be interesting in and of itself. But one of the most interesting things for me will be how the US bond market behaves early in the new year. 

There is the argument that US long government bonds have been artificially supported by the anticipation of US tax reform as corporations moved forward tax deductible contributions to their pension plans in order to take advantage of the higher old rate of 35%, which would be chopped to as low as 20% starting in 2018. 

If this argument has any merit, then US long yields risk jumping higher after the calendar rolls into January as pension flows slow dramatically.

Other events I will watch for early in the New Year include whether China sends any strong new policy signals after the February 16 Chinese New Year. Then we have incoming Federal Reserve chair Jerome Powell’s first Humphrey Hawkins semi-annual testimony sometime in February.

Emmanuel Macron
Emmanuel Macron's victory in April bucked the populist trend and led the EU away from an existential challenge. Photo: Frederic Legrand, COMEO /

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank

27 December
Loonie Watcher Loonie Watcher
What’s your prediction for 2018 loonie? We were expecting your 1.48 by year end but instead got this! Poloz is obsessed with the exchange rate and is manipulating so what’s your prediction on loonie ?
28 December
Dance like nobody's watching Dance like nobody's watching
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