Asia, oil, FRS: entering the New Year with old luck

For the first time since April 2014, Europe has seen the growth of business activity in all 19 countries

The December market, in general, showed little response to the raise of FRS rate: companies consolidated profit for embellishing their reports. Last year ideas have not lost their relevance, we should expect opening of long positions in US dollar in January. Moreover, there are enough of reasons for the after New Year's drive. If the December events were interpreted correctly, then we will face the following background for the following months:

  • ECB will continue the process of issuance; however, European APP program has been taken into consideration by markets. There are no drivers for movement yet;
  • ECB is beginning the year with the discussion of an unpleasant issue - most likely, they will have to miss reaching the target inflation level in 2016 (for the fourth time) again. It is becoming more and more difficult to adhere to the target of 2% regarding the key indicator;
  • The expensive dollar is an active hindrance for economy development, all of that is being continuously reflected in the official regional reports (see The Beige and Red Books);
  • FRS has saved its face and fulfilled its promises, the market has processed it, so we are expecting a quite lengthy period of low rates again. Raise of rates has a great significance for retention of at least small differential for carry trade operations;
  • In fact, present-day American rates can't be seen as zero rates - they are all negative, since all nominal values are eliminated by inflation, which is still higher at the moment. In order to have full-fledged capital inflow, rates have to go up to range 0.75-1.00%. When this luck comes our way, only the Federal Reserve knows.

Therefore, the general idea for the next half a year will be in effect: US dollar will have hard time growing, and whatever does not grow falls down. For the first time since April 2014, Europe has seen the growth of business activity in all 19 countries, including problematic Greece. After Eurozone's rise in December to level $1.0846 on the PMI positive data, euro resumed its fall after the publication of growth data in December by 0.2% (in the framework of one year) of German consumer prices, while analysts expected 0.4%-0.6% level.

The first Monday of 2016 became really "black" for the developing markets:

  1. Stock markets started the year with a rapid fall.
  2. Futures for American indexes lost around 1.5%.
  3. Angola devalued its national currency by 15%, which became the abysmal record for the last 14 years.
  4. The operation of the Shanghai and Shenzhen Stock Exchanges was suspended for, at least, one day after the fall of their general index CSI 300 by more than 7% in the midst of dramatically low industrial statistics - PMI index for December was 48.2 (the lowest since September 2015). Trade was stopped by the automatic system, which prevents from chain reactions on the stock exchange like the August crisis in the previous year.
  5. Against this background, we can see the strongest fall of the Chinese yuan since the time of devaluation in August: NBC set the exchange rate as 6.5 yuan for a dollar - which is the lowest since May 2011.
  6. The Asian players have sustained the demand for the protective assets: yen and gold.

Oil prices grew on Monday since large traders who placed stakes on further decrease of oil prices close short positions actively in the midst of the conflict between Saudi Arabia and Iran. The execution of Shiite Sheikh on Saturday provoked an attack on the Embassy of Saudi Arabia in Tehran, which literally enraged the Arab world and led to the break of diplomatic relations with Iran. Sudan and Bahrain supported the Saudis in this process. The probability of open war between the leading oil producers is still low; however, it may start regional conflicts such as a warfare in Yemen or Syria.

The current week will have the following serious event: FRS Protocol (January 6); it is unlikely that it will give solid arguments for purchase/sale of US dollar. Only fixing of the pace of FRS rate increase to US dollar exchange rate may reverse dollar downward in the mid-term perspective. It will be necessary to study the Protocol for the parameters of economy growth assessment for the promised 4-time rate increase in the current year by 100 bps, as Yellen declared in summer 2015 in the US Congress; also, let's look for:

  • mentioning of the likelihood of rate decrease to negative values;
  • discussion of a temporary pause before next increase;
  • inflation parameters and inflation perspectives;
  • discussion of FRS policy scenarios in case of slowing down of the economy;
  • assessment of the global risks.

NFP for December will be published as scheduled (January 8), expectations regarding the positive data on the labor market are significant. If published as predicted, we can expect strong growth of US dollar before the end of the month. For preliminary assessment, let's study the employment component in services sector and manufacturing ISM and ADP Employment report. If salaries grow above 0.2% (month to month), and the annual value will be around 3%, we should expect the growth of US dollar by the second spike regardless of the number of new jobs and unemployment level.

Large volumes are coming back to the market; however, it is difficult to assess the technique of such busy Monday. EUR/USD: all the December intraday supports have been penetrated. Confident consolidation below 1.0827 will trigger fall to 1.0670-1.0654. Despite the negative, the interest to the psychological level 1.1000 has been retained. In case of penetration of 1.1000, targets 1.1111-1.1129 will be relevant to the key mark 1.1364. No statements by ECB officials are expected; however, in case of a change of the schedule, we should expect verbal interventions in order to weaken euro.

作者: Navsher Bartash,
ForexChief Currency strategist