Written by Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM
Reduced demand for the USD has seen the UAE Dirham (AED) enter December on an unsure footing, writes FXTM’s Global Head of Currency Strategy and Market Research, Jameel Ahmad.
Whether it’s a possible impeachment, a grass-roots backlash or his apparent inability to convert his campaign pledges into policy, news around President Donald Trump continues to dominate the headlines. His promised tax reforms have kept the markets guessing throughout 2017, with ongoing concerns about his ability to implement his much-vaunted tax plans discouraging investors from seeking the greenback. It seems that ‘Trump Tax Stimulus’ may have been priced into the USD some time ago.
Renewed optimism surrounding GOP tax reforms contributed to US stock markets achieving record highs at the end of November. However, there remains a question mark over whether the plan that will ultimately be delivered will bear any resemblance to the one promised. It seems likely that, should President Trump fail to realise his pledged reforms, investors will remain cautious of the Dollar going into 2018. As the AED is pegged to the dollar, it is destined to follow its trajectory. The ongoing negative sentiment weighing on USD saw the AED begin December on the back foot, incurring losses against major currencies.
The Dirham slipped lower against the Euro as Dollar weakness supported EURUSD. Political tensions in Germany have dominated the headlines – and the financial markets. The previous concerns that German Chancellor, Angela Merkel would need to call another general election following the collapse in preliminary coalition talks at the end of November have reduced, encouraging the Euro to advance back towards 2017 highs against the Dollar, slightly below 1.20. This has of course led to the AED falling against the Euro, however, upside potential in the Eurodollar seems to be capped to 1.20. This means that the AED is unlikely to fall further against the Euro than it already has.
The more important question to ask at this point is whether the AED will slip further against the Euro in 2018. Looking at the improved economic outlook throughout Europe it is possible that this could happen, however, most of the positive news around EU economic data is priced in at this point. What investors will want to see before buying new Euro positions is indications that the European Central Bank (ECB) is preparing to withdrawal QE stimulus. With the ECB still maintaining a view of caution around the EU economy, and unlikely to change to a more optimistic tone potentially until the second half of 2018, this should limit the risk of the Dirham noticing further selling against the Euro once 2018 gets underway.
The first Monday of December dealt a heavy blow to Prime Minister Theresa May, with Brexit negotiations stalling as Northern Irish Unionists pushed for a ‘closed border’ between Ireland (which will remain in the EU) and the UK territory of Northern Ireland.
At this point, the Dirham is only at risk against the Pound if the United Kingdom manages to avoid a ‘hard Brexit’. Headlines that Brexit negotiations with the European Union are making progress have previously increased buying momentum in the Pound, although contradictory headlines have also resulted in Pound selling.
It should be noted that Brexit is set to be a long process filled with uncertainty, any Sterling gains driven by it are likely to be relatively short-lived, and AED could benefit from a volatility that may persist throughout negotiations.
Recently, the Dirham has enjoyed a round of strength against the Yen. This is mainly due to improved risk appetite in the global stock markets hurting demand for safe havens like Yen and Gold. Despite simmering tensions, the financial markets are currently pricing in very low geopolitical risk premium which is not something I think the markets can completely ignore and could still install buying momentum for both assets.