Hot Trades for 2017

2016 was a fascinating year in the global financial markets. Brexit, Donald Trump’s election victory and growing monetary divergences between the United States and the rest of the world were just three of the major themes that dictated trade over the past 12 months. These forces will continue to influence financial activity in 2017, giving traders plenty of opportunity to find yield in an otherwise volatile and unpredictable market. Below are five hot trade ideas for 2017.

  1. Long the US dollar, short the British pound and euro

The US dollar ended 2016 on a high note, soaring to fresh 14-year highs against a basket of other major currencies. At the other end of the spectrum, the British pound traded at more than 31-year lows, while the euro sunk to its lowest since 2003. With the Federal Reserve raising interest rates for the first time in a year and signaling a faster pace of tightening in 2017 and 2018, the dollar bulls are expected to control the currency market over the next 12 months.

Meanwhile, the Bank of England only recently expanded its monetary policy program to counter Brexit volatility, while the European Central Bank (ECB) extended its bond-buying program by an additional nine months. The GBP/USD and EUR/USD are therefore likely to resume their downward trajectory in the new year.

  1. Long the US dollar, short the yuan renminbi

The Chinese yuan lost roughly 7% of its value in 2016,[1] triggering fresh fears that Beijing’s policies would lead to competitive devaluations around the world. Capital flight from China is a major force behind the yuan’s weakness. It has also led to a depletion of Beijing’s foreign exchange reserves, pressuring intervention from the People’s Bank of China.[2] Although Chinese markets and the economy to have stabilized in the latter half of 2016, the renminbi is vulnerable to further devaluation. Investors may therefore expect the dollar’s strength to extend beyond the traditional basket of major currencies to also include the yuan.

  1. Long the US dollar, short the Japanese yen

In keeping with our currency theme, the Japanese yen is a prime short-selling candidate for 2017. In addition to a bullish US dollar, yield differentials are driving outflows from the Japanese economy, which is still struggling to regain momentum after decades of weak growth and deflation.[3] The Bank of Japan (BOJ) has already shifted course on monetary policy, focusing less on quantitative easing and more on rate targeting.

The International Monetary Fund (IMF) expects Japan’s gross domestic product to grow a mere 0.6% in 2017, highlighting policymakers’ uphill battle re-inflating the economy. [4]

  1. Long the S&P 500 Index

This time last year, very few experts were telling traders to long the S&P 500 Index, which is the gold standard of US equities. The election of Donald Trump to US president on November 8 has fundamentally changed the outlook on stocks.

“Technical analysis often shines as the fundamentals become more transparent. Surprise outcomes in 2016, especially the … US election, have led to a paradigm shift in financial markets,” Bank of America Merrily Lunch technical analysis Paul Ciana and Stephen Suttmeier recently said in a report to clients.[5]

Trump’s election victory triggered a massive rally on Wall Street, pushing the S&P 500 Index to consecutive all-time highs. Trump’s administration has promised faster economic growth via massive fiscal spending and even bigger tax cuts. These policies may lead to bigger returns for US stocks, making the S&P 500 an attractive play.

  1. Short gold – most of the time

The outlook on gold has deteriorated sharply since Donald Trump’s election on November 8. At its highest, the yellow metal retuned nearly 30% in 2016. By the end of the year, it had returned less than 7%. An environment of rising interest rates and surging US dollar make gold less attractive for traders. While this theme is expected to prevail in the early part of 2017, gold may become an attractive play should investors begin to doubt Trump’s growth agenda. With gold prices hovering back toward $1,100 a troy ounce, 2017 may offer plenty of opportunities to buy back the yellow metal at a bargain price. Gold may still be considered a bargain given the uncertainty surrounding the global economy.

[1] Sam Bourgi (December 24, 2016). “BTC/USD: Bitcoin prices Hit $900 in Year-End Rally.” Economic Calendar.

[2] CNBC (March 14, 2016). “Chinese yuan may weaken to 7 against dollar by year-end, Goldman Sachs says.”

[3] David Scutt (November 27, 2016). “Here’s Morgan Stanley’s top FX trades for 2017.” Business Insider.

[4] International Monetary Fund (October 2016). “World Economic Outlook: Subdued Demand.”

[5] Tae Kim (December 13, 2016). “Here are 3 top trade ideas for 2017 from Bank of America’s chart analysts.” CNBC.

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