DEUTSCHE BANK- Major currencies tend to respond to politics
It seems that the two most important currencies of the world – the US Dollar (so-called Greenback) and the Euro – might be responding to political events rather than economic announcements.
Last week, a Deutsche Bank Asset Management team came to a conclusion that the world’s two leading currencies are likely to react to politics more formidably than economics after doing a detailed research about the volatility of the Greenback and the Euro with significant global events. The report presented that the US dollar index has been dropping about 11 percent against its major counterparts and now trades at the lowest level of 2015 since Donald Trump officially became the president of the United States. Meanwhile, the European currency has been trendily advancing to its highest level since the beginning of 2015 from the April low thanks to France President Emmanuel Macron’s inauguration.
The Deutsche Bank team asserted that despite economic releases also putting a dent in the currencies’ moves, the most major influences are big political events such as elections or geopolitical tensions.
"These dates are important. They suggest, that for once, currency movements are based neither on the economy nor the otherwise almighty interest rate differential," the team said to their clients. "This time it's political. In a sentence, it's all about Trump winning in the US and Macron changing investor perceptions in Europe."
The following chart which they included in the report to delineate their conception compares the trade-weighted greenback to the trade-weighted euro.
As far as most investors conceive, developed market currencies like the US dollar, the Euro or Pound Sterling tend to respond to economic releases and interest rate adjustments, in contrast to emerging market currencies which are formidably influenced by political events. But after several top-tier elections and votes, the situation might have changed. Developed market currencies have now been exposed to react effervescently to politics as well.
"We believe it may no longer be possible to separate advanced economies from emerging markets by describing their political systems as displaying superior levels of stability and predictability of policymaking and political institutions," said Moritz Kraemer, chief sovereign rating officer at S&P Global.