Market Views For 2016 - page 5
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AUD to drop against all major currencies and USD to extend its strength.
Interpreting The Recent RMB Move - Goldman Sachs After the weakening of the RMB fix against the Dollar by 1.5 percent in December, the first full week of 2016 saw the pace of depreciation pick up, with the $/CNY fix weakening a further one percent. Besides the faster pace, the recent devaluation trend is notable because the Dollar has traded sideways versus the majors over the past month. Our China economists on Friday lifted their 12-month forecast for the $/CNY fix to 7.00 from 6.60 previously, while also raising their end-2017 forecast to 7.30 from 6.80 before, in part because year-to-date moves may signal a different reaction function of the authorities and because of their long-standing view that the cyclical picture remains weak. We complement that forecast change by giving some context to recent moves and provide some interpretation of what policy intentions might be.
China’s balance of payments has seen large capital outflows over the past year, which some argue makes large-scale devaluation inevitable. We caution against treating capital outflows as an exogenous variable, which marches to its own tune. After all, the two months in 2015 with the largest outflows were August and December, months when the authorities devalued the RMB. Our point here is not that there isn’t some “steady state” capital outflow, as Dollar-denominated liabilities are gradually unwound. After all, there were outflows last September and October, when – after the shock of the mini-devaluation in August – RMB fixed stronger. Instead, our point is that the authorities heavily influence the pace of capital outflows via the $/CNY fix (a policy variable), and thus – by extension – the drawdown in official FX reserves they need to absorb. This point is important, because it means that the balance of payments is not “out of control,” a comment we often hear. The opposite is true. A large and growing current account surplus – our last FX Views estimated it at $300 bn in 2015, likely to grow to $360 bn in 2016 – means that China is well equipped to absorb “steady state” outflows. The puzzle is why China weakens the RMB periodically, given that this fans fears of a larger devaluation, exacerbating outflows and thereby – endogenously – reserve losses.
One reason could be their stated objective of making the RMB more flexible and market determined (note that the intention to devalue the RMB has been repeatedly denied by the authorities). If this is what is going on, it helps to recall that the current account is typically weakest in the first quarter, a well-known seasonality that doesn’t just reflect Chinese new year. Between 2006 and 2015, the current account surplus has been $43 bn in Q1, $61 bn in Q2, $68 bn in Q3 and $78 bn in Q4 on average, making fundamentals for the currency the weakest in the first quarter. If a policy objective is to make the exchange rate more flexible and market determined, the first quarter is no doubt a prime candidate for weakening the RMB. Subsequent quarters could then see relative RMB strength, as the current account rises and flows improve. The revised forecast for the $/CNY reflects this rationale, by front-loading RMB weakness and noting that volatility, in addition to direction, may be at play in recent developments.
German industry body expects 2016 German GDP at almost 2% The German BDI with their latest forecasts
They might almost get it right
My 2016 Outlook for Gold and Crude oil.
GOLD
Gold faded for the third consecutive year with falling around 14% by the end of 2015. It had set on sell off rally almost through 2015 on expectations of US Federal Reserve Rate hike to end an era of low interest rate regime. Also due to weakening physical demand in two highest gold consuming countries, India and China, the bullion was set to trade in its negative territory. Gold prices peaked to $1307 an ounce in January after Swiss National Bank abandoned the Swiss franc-euro peg and the European Central Bank prospected a full-blown Quantitative Easing program to combat lower growth and inflation in the Euro land. The yellow metal found some support from Greece default issues during the June Quarter, although failed to sustain the recovery and eventually fell to $ 1080 in July on increased bets of a Fed rate hike in September. Fed surprisingly made a dovish statement at its September FOMC meeting, pouring cold water on expectations of a rate lift in 2015, also lending support to the non interest bearing gold. Later, the yellow metal marked its lowest settlement since February 2010 at $1046.10 on Dec 3 in anticipation of a Fed lift-off and on the back of an unusually hawkish ECB decision. And, finally the historic Fed rate hike was announced on Dec 16, with the US central bank raising the target range for the Fed funds rate by 25bps to 0.25%-0.50% for the first time in more than nine years.
Heading towards 2016, gold prices hover near 5 year lows as the Federal Reserve interest rate hike outlook is expected to remain the key theme next year. They have projected four hikes in 2016, raising upto 100 bps. On the positive note, other global markets like China, Europe and India are looking to extend their ultra loose monetary policy and resort to further currency debasement in order to spur economic growth. We expect Gold prices to remain under pressure till the end of 1[SUP]st[/SUP] quarter as dollar might show up some rally with Fed’s ‘gradual rate hikes’ anticipated at its March and June FOMC meetings. And, ongoing weakness in industrial metals and oil prices exposes further downside risks. Also, Technical outlook points to have its major support at $900. While in the second session of the year, bullion might find support from disinflationary effects from US on account of sharp USD appreciation and bargain hunting at lower levels from Asian Markets. It is also expected that the Euro zone recovery will gain further momentum as the QE program continues to have intended effects on the growth and inflation outlook. Hence, a stronger euro against the greenback could also push gold prices higher towards $1200 by end of next year.
Technically, we have witnessed Gold prices breaching a falling wedge formation in July 2015 and fell to a low of $1077. After that they attempt a recovery towards $1200 levels but got resumed back to its downward trend leading prices to drop to its fresh five year lows near $1050., with a pattern target at around $900.
From the chart we see a strong support lies between $1000-$900 zone, while in the long term if yellow metal manages to hold the key support, we could see a sharp rise in the prices back towards $1200 levels.
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CRUDE OIL
Crude prices have showed a lot of volatility over the course of 2015 as oil prices has plunged over 34% by the end of this year. The havoc started by the second half of 2014 as WTI crude oil was trading at $105 a barrel in July but then prices fell almost by 50% to trade at 54.45 a barrel in January 2015 on account of Robust production from US shale oil fields. Prices went under pressure as OPEC producers continuously over supplied the market where the demand for crude kept on decreasing. Oil prices rebounded in April, reaching a high of $62 but this was short lived as continuous rise in production from Saudi Arabia and Russia kept crude prices below $38 in August. Prices touched its lowest of $33.98, in seven years at the end of 2015. Inventories of crude oil in the US stand near eight month highs as producers continue to produce at high rates to maximise profits in low price environment.
It is widely expected that crude prices might stay in its negative territory for the rest of 2016 as both OPEC and US Shale Industry have determined to keep pumping oil off the ground despite of growing supply glut. It is also surveyed that US drillers could sustain its production at low cost of $30 and also Iran recently remarked that production is still possible at current low prices. Global growth is directly linked to oil prices, as stronger demand for oil should result in higher prices. Investors will have a watchful eye over china’s economic health, as it is the second largest importer of oil in the world. The slowdown in china in 2015 have resulted to lower global growth and hence a decreased demand for oil. Investors will also be taking clues from Economic growth, investment returns and geopolitical risks globally that could sway oil prices. In the first quarter of 2016, a boost in dollar from continual US rate hike might pressurize oil prices. While Quantitative Easing program by Europe and Japan might ease a bit of its downside risks. WTI is already trading at its lowest level since February 2009 and with the fundamental factors are depicting further losses ahead. Key technical support can currently be found $32.30, a break of which will see WTI trading at its lowest level since 2003. Technically a break above the descending trend line from June 2014 may suggest some technical boost to oil prices. But if prices continue in the same manner after the level of $30 we might see selling pressure leading prices to April 2003 lows of $25.80
Quant Models: NY & London Sell NZD Together; Bearish AUD, CAD - BofA Merrill New York and London sell NZD together.
This week’s variable market sentiment has weighted on equities and supported our recommendation for weaker commodity currencies. New York now joined London in selling NZD, which places Asia NZD/USD longs at risk (Chart 6). Our positioning model favors USD vs. NZD, AUD and CAD (Table 1). The fresh NZD/USD downtrend is just establishing and has further to go with MAA at 21% (Chart 7). The Residual Skew has sharply moved for NZD puts as risk reversal fell ahead of spot. In addition, Up-Down vol shows that volatility is higher when the spot goes down, showing bearish momentum in the pair placing long NZD positions at risk.
Bearish AUD and CAD.
In our view, commodity currencies are broadly expected to weaken against the US dollar. Our models paint a similar outlook for AUD and CAD. The USD became an asset in FORTE this week and further benefits from Residual skew for calls and bullish Up-Down vol against commodity FX.
US Preview: Eroding Odds & Exposed Sores Feels like last summer all over again. China's currency shenanigans are sending ripples through markets and the probability of the Federal Reserve (Fed) raising rates (again) is dwindling.
When even the otherwise fairly hawkish St Louis Fed President James Bullard questions the outlook for inflation, markets tend to listen. Rabobank analysts even credited him with Thursday's rally in oil and US equities.
Yet the parallels with recent history do not stop here. In each of the past two winters the US economy went through a swoon, with GDP grinding to a near-halt, before momentum returned. In each of the past two years, the drop in the unemployment rate surpassed the Fed's expectations.
That said, officials did postpone the lift-off several times last year because of a weakening in domestic data and the rise of external risks. Friday' retail sales data confined the fourth quarter GDP to a measly (if any) expansion, leaving officials and investors yearning for an early spring.
Although Bullard's parting with the hawkish camp certainly is noteworthy, some of his colleagues did not show the type of concerns, limiting themselves to a nod to increased global risks at the most, while keeping the planned four-hikes-in-2016 strategy alive.
Still, the probability of the Fed raising rates in March (the next meeting with a press conference) has shrunk appreciably since the beginning of the year and next week's data has little chance of boosting those odds.
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Another January BoC Cut? How To Trade It? - BofA Merrill Our out-of-consensus call for a 25bp Bank of Canada cut next week has very quickly become consensus. The market is now pricing a 50% chance of a cut this week (Chart 1), while fully pricing a cut by the March meeting. This is in sharp contrast to the period shortly after the BoC’s December meeting when only 6bps of cuts were priced for the entire year. With less than full cut priced for next week’s meeting, we would expect CAD to remain under pressure in a cut scenario despite its sharp move recently. In the January 2015 surprise cut, USD/CAD rose 2.3%, suggesting that we could still see over a 1% move with a 50% chance already priced in.
Additionally, the tone of the statement will be important. We do not expect a move to forward guidance or other unconventional measures at this week’s meeting (that could come later if the economy continues to struggle). But, a move to 25bps would leave the BoC at a level where forward guidance was implemented in April 2009. A more bearish statement and press conference tone could prompt the market to quickly price the prospect of forward guidance or beyond. The OIS curve remains upward sloping past two years (Chart 1), so the potential market impact is significant. In 2009, the CAD impact of forward guidance was overwhelmed by broader USD trends at that time as the Fed had just embarked on balance sheet expanding QE a month before. This time around, guidance that rates would be kept at current levels for a certain period of time would only reinforce the policy divergence theme between the US and Canada and weaken the C$ further. Moreover, a surprise move to other unconventional measures (QE, negative rates, etc) would drive much more significant C$ weakness with little priced.
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What's Next For The USD Near-Term? - Barclays We expect the USD to continue strengthening particularly vis-à-vis EM currencies as market volatility continues to trend higher. Concerns about the mishandling of the financial turmoil in China have exacerbated uncertainty surrounding growth and financial stability. Coupled with a global slowdown in economic activity, commodity prices continue to decline, as supply has not decreased at the pace it was expected before.
Despite doubts about the capacity of the Federal Reserve to increase rates in such an environment, we think that currencies such as EUR will underperform in the medium term because more stimulus is needed.
Indeed, the USD is not immune to Chinese growth concerns or CNY weakening, but if Fed policymakers are dissuaded from further policy firming, it is even more likely that other major central banks will push back tightening or ease policy further.
In the near term, however, traditional safe havens such as the JPY could find support in line with increased risk aversion (Figure 2).
This week, the most important release will be inflation on Wednesday. We expect core figures for December to show an m/m increase of 0.1% (2.1% y/y), in line with the market consensus.
Outlook for EURUSD and Yuan in 2016
EURO:
When talking about EURUSD; FED and ECB were the central players which played a significant role in beating down the currency. Where on one hand, ECB started with its quantitative easing program of $1.2 trillion early in March 2015; on the other hand FED made it clear across the board that US’ first rate hike since 2006 is sure to come in 2015. The bond buying program initiated by ECB did help its economy and successfully dragged Euro to its 2003 lows of 1.0519. While bids at around 1.05 levels helped the pair to come off from its lows and close the year at 1.0860 depreciating by around 10%.
This upward momentum in EUR will be seen limited because 2016 brings for Euro Zone many more challenges.
- First will be the pace with which FED raises the interest rates in 2016, where in the former is expected to raise the rates four times by the end of this year.
- Second will be the chances of extending the QE program beyond September 2016, if Euro Zone is not able to meet its inflation and growth targets.
- Third, the geo-political issues arising from refugee crisis, Russian tensions and ISIS aggressions will further add to the problem of Euro Zone.
- Firstly, the slowdown depicted by China in 2015 will act as a major factor in inducing investors to fly from Yuan to Dollar. The gloominess in the world’s second largest country has and will result in the outflow of funds from this economy resulting in more than 3% fall in the former’s foreign exchange reserves.
- Secondly, sluggish demand from China has put an undue pressure on the commodity complex making the latter forming bottoms.
- Thirdly, PBOC is itself involved in devaluing Yuan. This devaluation will result in increasing the competitive edge of China’s products against its peers giving a boost to their export demand and to other economic activities.
Yes, it is known that Yuan is accepted by IMF, still the investors’ lack the confidence in holding the former for the reluctance comes from politically managed currency. Thus, the depressing mode of commodities and unfit domestic factors of China is making me acquire short positions in Yuan. Since, PBOC policy of devaluation is still unclear, it can be said that 6.8000 will act as the major level on the upside, after which 7.0000 will act as the major resistance. While when the economic improvement will commence in China, appreciation of Yuan can help the latter to go beyond 6.3000 levels.So in my view the investors should hold their bearish stance on EURUSD, where the major support in this currency is placed at 1.0544 and after which comes the parity.
YUAN:
In 2015, Chinese Yuan played a major role in spurring the volatility in the slow pace growing markets. As China showed sluggishness in its demand patterns, PBOC resorted to devalue its currency so as to pump up China’s export competitiveness. When this major step was taken by the so called Central Bank of world’s second largest economy, jitters of high frequency were obvious in the emerging market currencies and commodities markets, which were being pushed to their multi-year lows. Despite IMF permitted to include Yuan in the SDR (Special Drawing Rights) basket of currencies, Yuan continued to depreciate against the US Dollar. The outflows by foreign investors due to depressed growth in China and interest rate hike by FED after a decade, further added to the depreciation mode of Yuan. Just like it has been for many currencies, Yuan depreciated by more than 4.5% in the last year. And in our view this depreciation will be playing its part in 2016 as well.
According to us, more than the global factors, the domestic factors of China are pressurizing China’s economy and its currency. There are number of reasons that would play their part in forcing down the performance of Yuan in 2016.
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Germany cuts growth forecast for 2016 ...but only by the smallest of changes.
Germany has cut its growth forecast for 2016 x 0.1% to 1.7%. This is per Der Spiegel.