Noureldeen Al Hammoury Chief Market Strategist at ADS Securities
Noureldeen Al Hammoury Chief Market Strategist at ADS Securities

The Middle East – the FX equivalent of Black Friday?

First Published: e-Forex Magazine 59 / Currency Clips / January, 2015

Q4 has been difficult, varied and for many Middle East investors has tested their assessment of the markets.  In a region safe and secure in the knowledge that oil underpins all commodities trading the recent dramatic fall in prices, below US$70, has led to reallocation of investments.  The decline in prices and the lack of a clear regional or international strategy on supply and demand is leading to local investors calling the barrel price as low as US$60.  This has to some extent reawakened interest in gold, the other regional favourite, with good volumes being traded especially in the UAE.  Fundamental weakness in the global economy has started to impact the local financial markets which have seen falls of between 7 and 8 per cent.  This may lead to further interest in gold, and has certainly fuelled one regional trend which is to buy the dollar.

As regional investors seek out new strategies they are backing the USD and going long against the euro, Sterling and of course the yen.  The yen is clearly under huge pressure at the moment.  Just a few days after the US Federal Reserve announced that their Quantitative Easing (QE) programme had come to an end the Bank of Japan surprised global markets with an announcement of an additional injection of 20 trillion yen.  The decision by the BoJ came just before new Japanese GDP figures confirmed that they are now in a triple dip recession.  Followers of our research will know that after the Japanese government decided to increase the sales tax hike in April, we started warning that a triple dip recession could be a possibility.  We also suggested that the result of the sales tax hike could well be an increase in the stimulus package by the end of the year – which has now happened.  

The Middle East – the FX equivalent of Black Friday?

Q4 has been difficult, varied and for many Middle East investors has tested their assessment of the markets.  In a region safe and secure in the knowledge that oil underpins all commodities trading the recent dramatic fall in prices, below US$70, has led to reallocation of investments.  The decline in prices and the lack of a clear regional or international strategy on supply and demand is leading to local investors calling the barrel price as low as US$60.  This has to some extent reawakened interest in gold, the other regional favourite, with good volumes being traded especially in the UAE.  Fundamental weakness in the global economy has started to impact the local financial markets which have seen falls of between 7 and 8 per cent.  This may lead to further interest in gold, and has certainly fuelled one regional trend which is to buy the dollar.

As regional investors seek out new strategies they are backing the USD and going long against the euro, Sterling and of course the yen.  The yen is clearly under huge pressure at the moment.  Just a few days after the US Federal Reserve announced that their Quantitative Easing (QE) programme had come to an end the Bank of Japan surprised global markets with an announcement of an additional injection of 20 trillion yen.  The decision by the BoJ came just before new Japanese GDP figures confirmed that they are now in a triple dip recession.  Followers of our research will know that after the Japanese government decided to increase the sales tax hike in April, we started warning that a triple dip recession could be a possibility.  We also suggested that the result of the sales tax hike could well be an increase in the stimulus package by the end of the year – which has now happened.  

The result of this is that the JPY is being sold anywhere and everywhere, with market commentators calling for a break above 120.0 for the USDJPY. But will it hold above that level?  If it breaks 1.20 or 1.21 it could well go further.  Middle Eastern traders are betting beyond that.  Over the past two years, traders have been holding a significant amount of USDJPY longs, which hit a record high at the beginning of 2014 and have shown a dramatic increase in the past two weeks by rising to the highest level since the beginning of 2013.  In other words, traders increased their bets for a stronger yen on the medium term after ignoring the BOJ’s policy guidance.  However, we have seen the first buying of USDJPY shorts with some investors looking for a snap election in December, which could reverse the slide. 

These investors may be proved correct as the recent economic releases from the US, in addition to the significant decline in oil prices, may lead to some frantic USD profit taking.  A trading equivalent to ‘Black Friday’ could be on the cards.  After the quick and fast profit taking traders will then find that they got a good price but at the end of the day have not bought or sold what they need for 2015!