The fate of the dollar will shape financial markets in 2019

Latin America

After rising by 7% against a basket of currencies in 2018, where is it headed next?

Over the holidays those who like their Christmas films free of seasonal cheer may have fixed on “The Lion in Winter”, with Peter O’Toole as Henry II and Katharine Hepburn as Eleanor, his estranged wife. Henry decides that none of his sons by Eleanor is a suitable heir and condemns them to death. Locked in a cellar as his father approaches, Richard resolves not to cower. “As if the way one falls down mattered,” mocks one of his brothers. “When the fall is all that is,” replies Richard, “it matters”.

Back at work, investors might usefully apply this aphorism to the fate of the dollar. In a volatile period for financial markets, it rose by 7% against a broad basket of currencies in 2018 and by 4% against a narrower group of rich-country currencies (see chart). One of the more robust principles of foreign-exchange trading is that what goes up must eventually come down. The dollar is over-valued on benchmarks, such as The Economist’s Big Mac Index (see Graphic Detail). It is due a fall. When that is all that is left, the manner of its falling will matter a great deal.

The bear case for the dollar is based on an expectation that gdp growth in America will slow markedly. Last year, it was boosted by tax cuts. That stimulus will fade. Interest-rate increases by the Federal Reserve will bite harder. A lower oil price is a factor. It hurts investment in America’s shale regions, but is a boon for oil-importing countries in Asia and Europe. America’s stockmarket is relatively dear. Its tech darlings no longer seem invulnerable. In short, an exceptional period for America’s economy is coming to an end. The dollar ought to lose ground, too.

But not just yet. In November Mansoor Mohi-uddin of NatWest Markets set out three pre-conditions for a decisive turn in the dollar: a “pause” by the Fed, a deal to end America’s trade dispute with China and signs of a pickup in the euro-zone economy. The first is now less of a hurdle. The Fed’s boss, Jerome Powell, hinted on January 4th that it might postpone further interest-rate increases. Talks on trade with China have resumed. But the economic data from Europe remain weak. Interest rates in America may not rise much further, if at all, but they are nevertheless higher than in Japan or the euro zone. Owning the dollar is still rewarding.

How might that change? Broadly, there are two scenarios. In the first, trade-war clouds begin to disperse. Tax cuts and looser monetary policy in China start to stimulate private-sector spending. That stirs other Asian economies, which in turn bucks up activity in the euro zone, which relies heavily on emerging-market demand. Bond yields rise in the expectation that interest rates will go up in Europe. They fall in America, as traders start to price in rate cuts. The dollar drifts down against the euro. A softish Brexit boosts the pound. Capital is pushed into emerging markets, in search of better returns. Stockmarkets rally, especially outside America. Everyone breathes a sigh of relief. It feels like 2017 again.

In the second scenario, the gap between gdp growth in America and elsewhere also narrows. But in this case, it does so solely because of a slowdown in America, rather than better news elsewhere. The trade dispute escalates. The continued uncertainty means China’s tax cuts are saved, and not spent. Further weakness in China causes other emerging markets to falter. The soft spot in the euro-zone economy turns out to be not temporary, but a reflection of weak export demand. Risk assets sell off across the board. The dollar falls sharply against the yen and the Swiss franc, habitual boltholes for the panicky. The euro stays weak. A shortage of safe-harbour currencies leads to a rising price for gold.

How closely reality conforms to one or other of these scenarios depends a lot on what happens in China. A trade deal with America would boost emerging-market currencies against the dollar, as would an effective fiscal stimulus. The path the dollar takes against rich-country currencies depends on the slowdown in America, says Kit Juckes of Société Générale, a French bank. If it is sudden, the dollar falls against the yen. If it is gradual, it falls against the euro.

How the dollar falls will be shaped by events and in turn will shape them. Investors who are wary of selling out of risk assets are advised by strategists at J.P. Morgan to take out some insurance by buying the yen, Swiss franc and gold—the assets that are likely to go up should things get rough. If a fall is all that is left, it matters that you have something to cushion it.



This article appeared in the Finance and economics section of the print edition under the headline “How the mighty fall”

The slow-burning effects of Europe’s new data rules

Latin America

Few expected an overnight sensation. Still, January 13th 2018 was supposed to mark a big step towards exposing the European Union’s banking systems to digital competition. The eu’s revised payment services directive (psd2) came into effect; so did a British variant, Open Banking, the fruit of an investigation by the national competition watchdog. A year on, there is little sign of a stampede to switch banks. Yet progress is quietly being made.

In essence, the new rules seek to ensure that digital technology sharpens competition, by loosening banks’ grip on customers’ financial data, but without compromising security. They allow third parties, whether tech firms or other banks, to gather information from several accounts—with customers’ permission—in one place, so that people can manage their finances better. They also make it easier for third-party firms to pay online merchants directly from customers’ accounts.

Open Banking is obligatory only for Britain’s nine biggest banks, although others have signed up. Not all of these were ready at the start. “For the past 200 years banks have focused on keeping customer data and not letting anyone else get at it,” says Emmet Rennick of Oliver Wyman, a consulting firm. “In the past year or two they’ve been told, ‘That’s not the game’. But they have improved their act. Some are rolling out their own aggregation apps. The average response time of banks’ apis—the software which gives access to the permitted data—to queries from third parties was halved between July and November.

Even so, Jaidev Janardana, chief executive of Zopa, a British online lender, says that the biggest improvement would be a slicker connection between Zopa’s smartphone app and those of would-be borrowers’ banks. (Applicants used to have to send pdfs of bank statements to confirm their incomes; now Zopa can look through banks’ apis.) Only half the applicants who reach this stage complete it: at banks with the clunkiest apps, a mere 15-20% do.

How banks’ apis will function elsewhere in Europe is also a thorny question. Until that is answered, “important parts of the political and regulatory landscape will remain unclear,” says Daniel Kjellen of Tink, a Swedish account aggregator. Last year the European Banking Authority, a regulator, drew up technical standards, due to come into force in September. Banks are supposed to have apis in place well before then, so that third parties can test them and regulators approve them.

Financial-technology firms worry, for example, that banks will redirect customers to their own apps to authorise the use of data. This could make the process cumbersome and put people off new services. Another concern is that standards may proliferate, raising third parties’ costs and doing little to unify Europe’s banking markets. The Berlin Group, which involves dozens of banks and financial firms, has published a common framework. Some regulators are also promoting national standards.

An open question is how much appetite Europeans have for more open banking. People are notoriously loth to abandon their banks. Yet there are signs of latent demand: Yolt, an aggregator owned by ing, a Dutch bank, already boasts more than 500,000 British users; online banks are making a splash. In 2019 banks and upstarts alike may get closer to an answer.



This article appeared in the Finance and economics section of the print edition under the headline “Open plan”

Macri spoke after hosting the summit of the Group of 20 that ended on Saturday with the agreement of all the leaders regarding the final declaration

Latin America

President Mauricio Macri said that Argentina is on the right track to forge a strong rebound next year after overcoming a financial crisis in 2018.

“Argentina is in a much better situation than 12 months ago,” Macri told Bloomberg TV in an interview on Monday in Buenos Aires.

“We have significantly reduced our deficit, next year we will balance the primary budget and we have already financed all our needs through the International Monetary Fund program, which marks a great, big difference,” he said.

Macri spoke after hosting the summit of the Group of 20 that concluded on Saturday with the agreement of all the leaders regarding the final declaration, unlike the G-7 meeting in June, in which the president of The United States, Donald Trump, withdrew its support.

There were no violent protests in the Argentine capital, which contrasted with the incidents recorded in last year’s G20 meeting in Hamburg, Germany, and the US. and China declared a temporary truce to their trade war.

More than just a host, the Argentine leader also held a marathon of bilateral meetings with leaders such as Vladimir Putin, Emmanuel Macron, Trump, Xi Jinping and Narendra Modi.

Elected in 2015, this year has been possibly the most difficult of Macri. A monetary crisis led the country into a recession and forced the head of state to seek help from the IMF, which granted the nation a record credit line of US $ 56 billion. A severe drought, massive sales in the global market, zigzagging policies and communication errors triggered the fall of the peso, which reaches 49 percent this year, the most pronounced of the emerging markets.

Possibilities for reelection
The economic slowdown puts obstacles in Macri’s path towards reelection next year. The approval of his government is at its lowest level since he took office and consumer confidence fell to its lowest point in 16 years in November.

After his government began this year with an inflationary target of 15 percent, prices are expected to rise 47% in December with respect to the same month of 2017, warns Bloomberg.

Thinking about the October elections, the president promised to maintain simplicity: “Continue telling the truth, continue collaborating with my citizens and showing them that this is the only way. This G20 helped a lot, because all the leaders who visited us at the summit and at the 17 bilateral meetings we had agreed that we are making the right reforms. “