Currency markets are – as yet – unfazed by the global tendencies for re-nationalisation!

A US president whose election campaign was based on nationalistic slogans, the UK’s exit from the EU, high popularity ratings of right-wing populist parties and their representatives in France, the Netherlands, Austria, Switzerland and Germany to some extent too – it is boom time for nationalism worldwide at present. This has not had any major, long-lasting effects on the currency markets up to now. In fact, the volatility that is seen as a measure for the existing uncertainty is at an unremarkable level historically. There are no signs of trends that are ascribed to the growing nationalistic tendencies.

A key reason for this is that the development on the currency markets is dominated primarily by the orientation of the central banks in the respective currency areas. Accordingly, the political situation and the nationalistic tendencies are primarily of importance for exchange rate development if they impact on monetary policy. For example, staffing open positions in a central bank’s decision-making body or a change in the monetary policy mandate could have a direct impact. Measures that are relevant for the central banks‘ fundamental framework would impact indirectly.

The EU referendum in the UK clearly demonstrated that a right-wing conservative or nationalistic party in government or in a country’s presidential office is not mandatory for this. Despite having incurred considerable losses in the wake of the referendum, the pound sterling is trading on a trade-weighted basis only just below the level seen between 2009 and 2013. Nonetheless, the prospect of Brexit has clearly left its mark. This is the case especially in view of the worsening outlook for long-term growth prospects and hence for long-term interest rates too. The Bank of England was also forced to react to the changed situation with a key rate cut and a revival of the bond purchase programme.

Several events are pending in the months ahead that may possibly impact indirectly on the central banks and their orientation. These could lead to radical changes in global monetary policy and therefore spread to the currency markets too. Tax reform is currently being debated in the US. The introduction of a border tax adjustment that would offer advantages to US exports while burdening importers at the same time could pave the way for a global trade war. Central banks of smaller, more open economies would likely respond with more expansionary measures, thus putting their currencies under selling pressure. However, the US economy and subsequently the orientation of the Federal Reserve and the US dollar would hardly be affected at least in an international comparison. The second-largest risk is the renewed speculation about the breakup of the EMU (presidential elections in France, Brexit negotiations among other things). The European Central Bank would no doubt try to „do everything possible to protect the single currency“ and take expansive measures to counter these tendencies. The common currency would surely respond to this with losses.

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