Thinking about the direction of currencies in 2016, we have to start with the question: what will be the main themes likely to persist throughout the year? The past year was dominated by fears about global growth, particularly China; the decline in commodity prices, particularly oil; and the dénouement of policy divergence between the US and the rest of the world, particularly the EU.
The global economy doesn’t hit a reset button on 1 January and so I expect these trends to continue at least into the first half of the year and probably longer. Specifically, I expect Chinese growth to slow further as the government continues its multi-year effort to restructure the economy. That means the price of commodities used for capital investment, such as iron ore and copper, are likely to remain under pressure for longer than those for day-to-day use, such as oil. The oil-sensitive currencies (CAD, NOK, MXN, RUB) may therefore recover vis-à-vis the AUD, CLP and ZAR.
One side-effect is that EM countries, particularly China and the oil producers, may continue to run down their FX reserves. Their sale of US bonds should keep US interest rates well above those of other countries and support the dollar.
Slower Chinese growth and weak commodity prices also imply no quick return to inflation. The ECB and BoJ are therefore likely to ease further. I expect the BoJ to follow the lead of the ECB and SNB and to lower rates into negative territory for the first time in that country. That would probably propel USD/JPY higher still.
At the same time, the FOMC thinks rates will rise much more quickly than the market does. Assuming the Committee is even only half correct, that means further monetary policy divergence and a lower EUR/USD.
As for new trends, watch the refugee crisis in Europe. This issue will add to the pressure on the EUR as the institutional foundations of the EU starts to crumble: first the Schengen Agreement, then the debt limits, and then what? Furthermore, political disarray and high levels of immigration on the continent increase the possibility that the UK votes for a Brexit – another big uncertainty for the market, and one that is liable to weigh on the pound.
The US would seem to be an island of stability in this uncertain world. However, the impact of higher US rates and the Presidential election in November is likely to add to the global uncertainty. Still, the economics and the politics favor the dollar in 2016, in my view.
Marshall Gittler is a renowned expert in the field of fundamental analysis, with over 30 years’ experience undertaking top level research of the financial markets. His career spans a range of elite investment banks and international securities firms including UBS, Merrill Lynch, Bank of America and Deutsche Bank. Marshall has most recently established himself as global thought leader for clients of FXPRIMUS – a global provider of online forex trading – educating and delivering insightful FX research, helping traders to make the best trading decisions.