The US economy has had, essentially, a low growth, low wage, low inflation recovery. The US Federal Reserve has taken the unusual step of tightening policy in spite of having below target inflation and below target wage growth. Further, those recent wage gains are likely due to required minimum wage increases to $15.00 USD (about £10). With an average national work week at 46.7 hours results in yearly earnings of $36,426.00 (about £24,447), and that’s before deductions. Leading economists have criticized the Fed action. However, one doesn’t need to be a ‘leading economist’ to logically reason that if growth was muted with a 0% base rate, it will most likely continue muted with a 0.25% base rate. Further, the result of the rate increase may be a strengthening of the Dollar in excess of what the Fed estimates. The Fed should have considered the continued capital flow into Switzerland, for instance, in spite of exchange intervention warnings and a penalty deposit rate.

Lastly, the most critical upcoming EU related issue is the UK referendum on EU membership. Again, the rhetoric may create the perception that it’s only a matter of time. Aside from the politics, the trade advantage of remaining in, is quite an incentive; over 46% of UK exports are destined for EU and over 53% of imports originate from the EU. Not that this trade will stop, but how might intra-EU trade partners react? Further, the Eurosceptic lobby may be faced with a tsunami of unintended consequences, for example, Scotland may wish to remain within the EU; how might that affect voter sentiment in Northern Ireland or even Wales13? What advantage can the U.K. gain from secession over negotiation, particularly over the course of many years?

It’s important to note that since March, the Euro has traded in a range against the majors. At the 3 December meeting ECB President Draghi announced further easing, leaving the door open for more if necessary. The announcement was criticized as insufficient. When viewed in the wider context of the global economy, it might be fair to say that the ECB decision was perceived to be insufficient; however, the ECB monetary policy committee’s perception may be more optimistic in the light of the global dynamic.

It’s reasonable to conclude then, should the Asia-Pacific region continue to weaken, the Euro may outperform the Yuan, Yen as well as all of the other regional currencies. The ‘oil glut’ will help keep cash in the pockets of EU consumers. A major restructuring in the Asia-Pacific region may also be a benefit by returning or creating manufacturing jobs to the EU. Further, as Switzerland, Denmark, Sweden, and Finland and have proven penalty deposits are no guarantee against capital inflows. Hence having deposit penalties does not exclude the EU from capital inflows. The Euro may not outperform Pound Sterling or US Dollar in 2016, however, the Euro might well outperform expectations, or in other words the Euro may outperform its perception.

Mike Scrive
Technical Analyst
Accendo Markets

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1 Data from IMF includes 2015 estimates
2 One must confess that the Swiss National Bank does have some justified concerns over the value over the Franc when viewed from the same perspective.
3 Bloomberg 22-12-2015
4 BBC 23-12-2015
5 US Bureau of Engraving and Printing
6 The National Banking act of 1863 created a limit amount of ‘greenbacks’, essentially IOUs issued to soldiers in lieu of specie. Banks continued to print their own currency and US legal tender was a hodgepodge of notes and coins until the Federal Reserve Act of 1913.
7 QE as well as base rate policy regimes may be outdated, altogether.
8 Bloomberg 28-7-2015
9 European Commission
10 The Hungarian National Bank has been selling Euro reserves, purchasing Swiss Franc to pay off Swiss Franc denominated loans; notice the leveling out of EUR/HUF in the grid
11 The Czech Republic does maintain a floor of 27 Koruna per Euro and expects to keep it into 2016. The CNB does reference in writing its commitment to ERM II, but is not officially committed to the ERM II band requirement. It seems well able, nonetheless. Denmark is actively committed to ERM to, and the Krone is pegged to the Euro with an opt-out
12 Forbes 22-12-2015
13 BBC 23-12-2015