Katie Ellis: Hello and thanks for joining. Leading the conversation insights from Wells Fargo series. I’m Katie Ellis and I’m the communications manager supporting wells Fargo’s international group. Wells Fargo foreign exchange provides our customers with services ranging from currency exchange and international payments to hugging and currency risk management solutions or one of the largest foreign exchange market dealers in North America with offices in 14 global locations, so who better to speak with about foreign exchange. Then my colleague Fred standby with Wells Fargo’s foreign exchange risk management team. Fred, thanks for joining us.
Fred Stambaugh: Thank you, Katie. Happy to be here.
Katie Ellis Given that the currency market is always fluctuating, how did the US dollar fare in 2016 relative to other major currencies?
Fred Stambaugh: Well, in three words down and then up, but of course it’s more involved than that. When you’re talking about the general level of the dollar, you’re really talking about a whole series of bilateral exchange rates. The dollar against the British pound, the dollar against the Japanese yen against the euro and so forth, and each one of these exchange rates marches to the beat of its own economic drummer, if you will. So for example, the Canadian economy is heavily involved in natural resources and that currency tends to track with commodity prices, the price of crude oil in particular as another example, the British pound fell sharply in the middle of 2016, um, because the, um, the referendum on British membership in the European Union came back with a surprise leave vote, uh, and the pound fell 10 percent in the course of a single day, very dramatic and traded weaker after that.
Fred Stambaugh: So when you’re talking about the overall level of the dollar, you need to pull all these different exchange rates together in some sort of a, of a portfolio. And there is an index that investors look at which brings the currencies together in a trade weighted basis. And that index did indeed fall by about six percent in the first four months of 2016 and rose to new heights afterwards. So what are some of the factors contributing to these movements? Well, as I said, each individual exchange rate has its own drivers. If I were to point at something highly simplistic and overarching, I’d have to say interest rates. Now the Fed has been talking about raising interest rates really for several years, um, and against a background of low end, even negative interest rates and other countries that generally speaking pretty bullish for the dollar. So what happened in 2016 was that the Fed finally raised rates for the first time in about 10 years at the end of Twenty 15 and December of 2015 at the time the expectation was for further rate rises three, maybe even four over the course of 2016. And when those did not transpire, investors express their disappointment by selling the dollar down. That expectation turned around long about May of 2016 and the dollar rose since then and, uh, continued to new heights.
Katie Ellis: What trends have you seen in the foreign exchange markets over the last few years?
Fred Stambaugh: Well, apart from the ups and downs and currency markets themselves, there are a number of things in the currency business that bear mentioned. One of them is that due to regulation and capital requirements, banks have had to focus intently on those things that they do very well. Um, couple that with the volcker rule, which was part of the Dodd Frank Regulatory Reform, which prohibits banks from doing much proprietary trading. The upshot has been that banks have pulled back from a lot of their market making a, leaving gaps in liquidity. A markets with lots of liquidity are not good things because it could lead to inefficient hedging, a execution and so forth. Now, to a certain extent that vacuum has been filled by less regulated nonbank entities who have come in, hedge funds mostly, uh, who are actually making to a prices to the market and that’s all well and good.
Fred Stambaugh: But one may wonder how those funds will react. And the next financial crisis, they may decide that their investors are best served by ceasing that activity and that would be a problem. Uh, another thing to think of a, again, an outflow of this movement of banks focusing on what they really do well is that they’re pulling back and sometimes even exiting certain businesses and services altogether. Other clients still require those services. So one of two things will happen. The clients either need to establish new relationships or banks have to figure out other ways of providing those services to their clients. So what I think you’ll see and we’re seeing already is from the largest to the smallest banks, they’re being more and more creative about establishing networks so they can deliver services to their clients that they don’t provide themselves.
Katie Ellis: Do you expect these trends to continue or do you see new trends emerging?
Fred Stambaugh: Well, I do expect these trends will, will, will continue, uh, the new administration campaigned on regulatory reform and that may lead to some relaxation of some of the constraints on, on financial institutions, but I think the underlying movements from technology and other sources will force these trends to continue.
Katie Ellis: Well, thank you for joining us today. We appreciate you sharing your insights with our viewers.
Fred Stambaugh:My pleasure. Thanks Katie.
Katie Ellis:This concludes today’s insights from Wells Fargo video. We hope you’ve enjoyed the discussion and invite you to join us again for future videos. If you’d like to submit a topic of interest for us to discuss in a future video, please email us@Gfiatwellsfargo.com. Thank you and we hope to hear from you soon.
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