When it became clear the British would vote to leave the EU, the pound dropped by about seven per cent. The dollar was also affected by an election. The debates between Trump and Clinton, the victory of Trump, the investigation into Clinton’s e-mails: everything can be seen in the rates. How do these markets work, and what are the expectations for the coming months? Joost Derks of the Dutch Payment & Exchange Company (NBWM) held a presentation during the AGF Kennis-(sen) dag 2016 (fresh produce knowledge and acquaintance day 2016).
Joost Derks of the Dutch Payment & Exchange Company (NBWM)
“The electorate’s gut feeling played an important part,” says Derks. The rate of the pound dropped after Brexit was announced, and again when the government announced they would trigger Brexit in the short term. After Trump’s victory in the US, the rate is now recovering. “The market is recovering, despite enormous differences in ups and downs,” Derks says. “That is called reversion to the mean: the rate eventually returns to the long-term average.”
It was also a turbulent year for the dollar. The effect of the debates between Trump and Clinton during the election could be seen in the rate of the currency. When the CIA decided to reopen the investigation into Clinton’s e-mails, on the 28 October, it resulted in a weaker rate. The gut feeling and dissatisfaction in society also played an important part in the result of the US election.
Development rates
The development of the rates of the euro, pound and dollar is dependent on various factors. Next month, elections will be held in Europe. Austria will vote, but the referendum in Italy is more important. Prime Minister Renzi wants to push through reforms, and has staked his political future on the result. If the result is ‘no’ it will mean another win for populism. “That means another crack in the euro zone, and in the euro,” Derks continues.
The policy of the Central Banks is also crucial for the development of the rate. The American Central Bank, the Fed, will convene next month and will probably increase interest rates. That is positive for the dollar. The ECB will probably hold on to the buy-back programme which was started in 2014. “The euro will be under more pressure against the pound and the dollar.” Derks also expects that the dollar will be stronger compared to the euro in 2017. The British pound will also recover, he expects.
For traders it is important to cover the risks involved in variable exchange rates. “A currency policy is important because the markets are unstable, and the exchange rate could have much impact.” For example, a weak pound is favourable for importers in the Netherlands. A stronger pound is positive for exporters. “There are a few things you could do to cover risks,” Derks concludes. “You could do nothing and move along with the market. That is no problem if you can pass on costs to customers. You could also fix the rate for a certain period, covering risks.”
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