Emerging Markets / January 16, 2017

Interest Rates, Foreign Exchange & Economics for 2017

With the onset of a new year, investors and policy makers worldwide face a large degree of uncertainty as they seek to reign in maximum economic growth, boost yields, and ensure positive financial performance. Not only individual and institutional investors, but also governments and nations as a whole, have much at stake as they seek to finally overcome the ripples left by the 2008 financial crisis. Furthermore, the challenges triggered by globalization during the first decade of the 21st century have led to profound social changes that are threatening the traditional political order throughout the western world.

Interest Rates, Foreign Exchange & Economics for 2017

It is estimated that global economic growth during 2017 will be of 3.5%. Though modest, this forecast is a sign of ameliorating health for the global economy. Another encouraging sign is the fact that the Federal Reserve of the United States raised its target interest rate range from 0.25-0.5% to 0.5-0.75% during its December meeting. This scenario and further interest rate increases are expected to favor savers and conservative investors who wish to protect their capital from losses due to inflation. Similarly, an increase in interest rates should lead to an increase in the yields of traditional government-backed securities, thus, making these financial instruments attractive once again. In fact, throughout the last several years, the yields of government-backed securities have been so meager that most of them were unprofitable in the long run and unattractive to investors in need for substantial returns.

Furthermore, as global inflation is expected to increase due to higher prices within the fossil fuel markets, investors worldwide will be procuring higher yields. The rise in the US interest rate by the Federal Reserve and the expected inflation increase should lead other central banks to raise their respective interest rates as well. Currently, the Bank of Japan maintains the lowest interest rate in its history at -0.1%, the European Central Bank holds its interest rates at 0%, and the Bank of England is also at a record low with a rate of 0.25%. Economic hardship and the need to increase consumer spending has forced the central banks of these developed economies to such low rates. However, as economies regain traction interest rates should increase as well.

Another major element to take into consideration is the Foreign Exchange market. As the Republican administration takes office in Washington and prepares to implement new policies, the US dollar (USD) has gained strength internationally. Normally, this should boost the exports from countries whose denomination is not the USD. Nevertheless, uncertainty surrounding the future and openness of international trade could damper the performance of manufacturing and export economies. In turn, this could lead to prolonged stagnation in countries such as Japan or even the United Kingdom.

Finally, OPEC and other oil-producing countries will continue to leverage their economic potential in order to defend their interests. During the coming weeks it will become clear whether the production reducing deal reached at the end of 2016 is proving beneficial for oil-producing economies or not.

(Read more about Oil Producers seek to Strengthen Industry Profits)

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