Fundamental Review: 2016 Forex Titans

Our objective in this review is to cover as much as possible in bullet points on matters to look out for in 2016 within the foreign exchange world. It is true that most of the issues may have been obvious or in plain sight but the consequences and questions raised are worth a moment to discuss. This is far from a “perfect” coverage that one would hope for but this report should be taken as an overview.

Best of luck trading in 2016 and may the festive season brings joy and happiness to all our readers.

USD

  • Yellen planting the seed of certainty and calmness in this holiday season
  • Embracing 2016 with open arms and potentially strong equity market was the main message
  • Playing down the likelihood of slowdown in the economy and Yellen made a strong point that remain the case
  • The general market is expecting the USD to be appreciate albeit slightly slower
  • External worries – other countries should get their acts together
  • 2016 Election year is a major factor to take into consideration
  • November 8th 2016 will be a key determinant on the USD
  • Will a strong USD be a worry in the future?
  • Does the rate hike revive the USD as a safe haven status? or at least reinforces it?
  • What other tools does the Federal Reserve have should the economy hit the dirt?
  • Will the Fed back out and do a U turn after the first rate hike?

USDX saisonal

USDX Vierjahres-Wahlzyklus

5 min dax

Europe

  • Draghi et al has got an ace card up their sleeves (QE expansion)
  • Economy is picking up with a weaker Euro and the ECB would prefer this course
  • US vs EU divergence may grow wider – whilst the European market is still QE supported – money flow to the equity sector could pick up
  • Risk to the upside on the EUR/USD could happen if there is a severe risk off events
  • “Saving Private Greece” may not happen again in 2016
  • On-going battle to fight deflation remains to be the agenda for 2016
  • SNB Jordan will maintain the view to intervene the market whenever possible

EURO / USD saisonal

bull-run-spain-630x332

UK

  • Carney et al in the spotlight to follow the US in rate hike but all bets are off for early rate hike in 2016
  • Will remain data dependant and as long as signs of growth are encouraging – Sterling can only go higher (against other basket of currencies barring the USD)
  • BOE will be put in the spotlight as the Fed has in 2015 – when will they hike scenario
  • A mini hike and dovish remark will certainly relieve the market

GBP / USD saisonal

bull down syndrome

Asia

  • Realm of uncertainty will persist here
  • Yen will continue to weaken – no change in the course as BOJ fight for inflation target
  • Abenomics will need to do more in 2016 and with more US rate hike – the 3 arrows could well take Yen lower (concentration traders are watching closely though)
  • Yuan devaluation will continue as the economy look to maintain a healthy growth
  • Chinese government will need to be more pro-active in managing their growth and currency
  • As long as Chinese economy is in the rut, other emerging currencies will play cue and actively devalue to stay competitive
  • Other EM currencies such as Malaysia Ringgit and Indonesia Rupiah are at the mercy of the USD strength due to their political uncertainty

YEN / USD saisonal

Commodity Currencies

  • Continue battle with commodity glut but will we see a light at the end of the tunnel?
  • Any sign of capitulation in the commodity sector could well affect the policies that the RBA and RBNZ will take into 2016
  • Expect both central banks to maintain a dovish view but traders will be cautious at any uptick on the economic data out of this region

Conclusion

There is no doubt of further appreciation in the USD strength over the next 12 months. Judging by from the fundamental perspective, a slow appreciation on each federal reserve meeting could be the gradual effect that Yellen et al wants. Such biased stands as long as the global economy maintain its course and steer off from any black swan events or shocks. The risk to that is the unwinding of the USD and the exodus of shorts from Euro and Yen trade – which may create a vicious short covering session.

Looking further ahead, a dovish stance from global central banks will remain to be the case. It is true that the US is ready for a rate hike and the phase of normalization has begin. Other countries will have to follow suit but will take time to do so. There is no denying that global inflation remains to be a major problem given the current commodity glut. This particular industry from mining, shipping to manufacturing will be hit hardest and another year of low prices cannot be avoided.

The author admit that the above report is far from complete and there are many other intricate factors that may have been excluded but an overview here is the main objective. 

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