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2016 has been the year where the political/market analyst community has at times been thrown into disarray so why will 2017 be any different? Our FX Strategists, Bilal Hafeez and Jordan Rochester, look at the 'grey swans' of 2017 - unlikely but impactful events.

This is a reality that the market has started to come to grips with, but while we would like to be able to predict black swans, by definition they are unpredictable. However, its close cousin, the grey swan, can be envisaged.  These grey swans, in our opinion, lie outside the usual base case and risk scenarios of the analyst community. So we have donned our creative hats and have come up with 10 potential grey swan events for 2017. We have avoided the more widely discussed scenarios (e.g., a break-up of the euro area, a Trump impeachment or a China implosion). Instead, we have selected topics that have not been as widely discussed.

In this video, Bilal and Jordan dive into 5 grey swans that could have a significant geopolitical impact:

  • EU reform, UK re-joins: The suggest Brexit could reverse and become Bremain requires a series of improbably events that most would vehemently disagree with, including us.  But as 2016 was the year politics "stumped the consensus", why couldn't 2017 do the same?

  • China floats currency: The probability of China shifting to a complete market-determined FX regime in the near term is very low in our view, and the current path of periodic FX flexibility and active FX intervention is likely to continue over the next 12 months at least.

  • Fed muzzled: During the election campaign, Donald Trump made his disapproval of the Federal Reserve and of Chair Yellen quite clear, and mentioned repeatedly that interest rates should be much higher, that the Federal Reserve balance sheet should be reduced and that the central bank was playing politics with its monetary policy.

  • Russia flexes its muscles: The idea of Russian military aggression in Eastern Europe is an extreme event.  It is not our baseline at all that Russia will undertake any military engagement against Emerging Europe in 2017.  President Putin is likely to be kept busy however the foundations for such a risk may well emerge.

  • Japan's Abe loses power: We are expecting a general election sometime in 2017. The ruling coalition currently holds the super majority in the lower house and current polling suggests opposition parties remain unpopular.  The biggest political shock would therefore be anything that fractures this stability.

 Infographic Ten Grey Swans for 2017

 

Needless to say, none of them are our base case, but we think it is better to be prepared than not. Read the full Grey Swan report here and search our Themes and Trades page for further insights.

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