What's Ahead For The Dollar In 2017?
Jay Goldman | Jan 06, 2017 09:12AM ET
With 2016 finally over, it’s time to roll out my expectations for the USD in 2017. I am selecting three different pairs that I expect will have the biggest movement during this upcoming year.
USD/NOK
My favorite trade in these upcoming few months is probably the dollar against the Norwegian krone. 2016 started with the NOK trading at an all time low against the USD at almost 9 krones to 1 dollar, during the first half of the year we saw a 10% drop in the value of the dollar, but towards the end of the year the USD managed to retake most of that move, and closed the year right around the 8.70 mark.
In my eyes, 2017 is definitely going to be the year of the NOK, and I expect to see it strengthening significantly in the next few months. I am basing my assumption on a number of factors-
1) The Norwegian government is currently holding total assets worth roughly 900 billion dollars spread around foreign Stocks and Bonds all over the world, this translates to every Norwegian citizen having a surplus of roughly $70,000 (just as a comparison, in the US every citizen is in debt). This is by far the largest budget surplus in the world.
2) Oil prices have been stabilizing in recent months, and with the output deal that was recently reached by OPEC, we see prices continue to rise during 2017.
3) The USD is going to run out of steam this year and that combined with NOK strength will contribute to the move.
In conclusion I expect the pair to be trading between 7-7.5 or about a 12% drop from right now.
EUR/USD
Another currency that I think will perform well in 2017 is the euro. The euro is another currency that started 2016 strong, but ended trading at 13 year lows dropping below the 1.04 level briefly. While many expect to see the euro trading at parity with the dollar during 2017, I do not see that happening, to the contrary, I expect to see the EUR/USD trading much higher.
The main catalyst for this move will probably be the French National Elections which will take place on the 23rd of April. Once the election is over and Marine Le-pen will not be elected, the markets will believe that political stability has returned to the region and that should signal the beginning of a huge surge in the price of the euro.
There have been many positive signs from the Euro Zone recently- economic activity is up, Stock Markets are on the rise, and inflation is also moving in a positive direction. All these factors lead me to believe the EUR/USD will be closer to 1.20 than 1.00 by the second half of 2017.
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USD/MXN
The third, and probably the highest potential (although riskiest) trade will be on the dollar against the Mexican peso. According to my models, the Mexican peso is the cheapest currency in the world right now, and that provides us with the possibility of a huge correction in this pair. The peso is currently trading at almost 21.5 to the dollar, while the true value should be more around 14-15 to the USD, which means that right now the market is pricing in the worst case scenario in regarding to the Mexican economy.
2016 was a terrible year for the MXN, which saw a 20% decrease against the USD, most of these losses can be attributed to the fact that Donald Trump has won the election in the United States and was threatening to cancel trade agreements and tax US companies that operates plants in Mexico instead of the US in order to increase their profit margins.
The fact is that Trump has not even taken office as of yet, and even when he does, that won’t mean he will go ahead and fulfill all of his campaign promises, and as I stated before, the market is currently pricing in the worst case scenario, meaning that all we need is one positive event in order to turn sentiment around. This coupled with the likelihood of the Mexican Central Bank actively intervening in the trade if the exchange goes over 22, makes me expect to see a big turnaround during 2017, and I wouldn’t be surprised to see the USD/MXN trading below 19 by the end of the year.
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