Currency Market Analysis

Jan 04, 2016 | Currency Market Analysis

Global Themes

A volatile start to the New Year rattled global markets and knocked the U.S. dollar to multiweek lows. 2016 made its debut in volatile fashion with markets fretting over fresh signs of weakness in the world’s No. 2 economy, China, which triggered a roughly 7 percent plunge in Chinese stocks, and a crisis in the Middle East between Saudi Arabia and Iran. The dollar struggled as traders shunned yield and sought safety in havens like the yen and Swiss franc. China’s dominant factory sector contracted for a tenth month in a row in December, fanning worries about Chinese and global growth. The sour news from Asia’s biggest economy to start the year gnawed at currencies such as the Aussie and Canadian dollars which have close ties to global growth. Volatilty could remain elevated in Week 1 of the new year with top tier U.S. data on manufacturing, due today, and Friday’s always impactful monthly nonfarm payrolls report, a critical driver of Federal Reserve policy.


An ugly start to the new year for global markets amounted to an auspicious beginning to 2016 for Europe’s single currency. The euro notched mid-December highs as roiled global stock markets put traders in a safety frame of mind, sparking some unwinding of bets on higher yielders at the expense of those with little to no yield, like the euro. Divergence in monetary policies between Europe and the U.S. are expected to be chief catalyst for euro/dollar over the coming year. A sense the door remains open at the European Central Bank to lower rate policies doesn’t bode well for euro buoyancy over the long haul.


The year may be new, but the factors driving sterling remain old and negative. Sterling flirted with nine-month lows against the dollar, dogged by the familiar weights of uncertainty over Britain’s place in the European Union, and expectations that uneven British growth wouldn’t lead the Bank of England to follow in the Fed’s tightening footsteps anytime soon. The opening week of the year features key U.K. data on services growth Wednesday, and the trade deficit on Friday.


The safe harbor yen soared to mid-October highs against the dollar as risk-wary traders shunned yield in assets denomimated in currencies from the U.S., Australia and New Zealand. The yen tends to shine when market turbulence and volatility dominate, a time when many shift the carry-trade into reverse. The weak shape of Japanese economic fundamentals, though, augur a weaker yen against the fundamentally sound U.S. dollar.


Mideast tensions helped oil get off to a quick gain to the year. But the loonie continued to struggle as broader worries about global growth and fresh weakness in China dominated. Canada’s currency logged its worst year in seven in 2015 when it shed some 19 percent against the dollar, as plunging oil prices took a toll, knocking the Canadian economy into a first half recession, and led Canada’s central bank to cut lending rates on multiple occasions.


Expectations for the dollar to continue to outperform in 2016 were of little comfort to dollar bulls as the U.S. currency slid to two- and 11-week lows against the euro and yen. Many have high hopes for the dollar in 2016, with the Fed poised to guide U.S. interest rates higher. But with higher yields come a tendency to underperform when global market volatilty ensues like it has on the first trading day of the new year. For clues on whether the Fed would boost its key rate before the end of the first quarter, markets this week will look to critical U.S. data Friday on the job market. Forecasts call for U.S. hiring to have increased by a solid 200,000 in December, following November’s netting of 211,000.

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