There is a lot of consensus among market analysts right now looking ahead into the new year of 2016 regarding what we can expect in terms of major market movements.
Most see the USD continuing to get stronger and commodity currencies continuing to get weaker – at least to some extent. This suggests that the best long-term Forex trades in the market right now are long USD/CAD – a strong trend that has already been going on for a while – and short AUD/USD, which is a long-term trend that has begun to pick up again in recent weeks. The Canadian dollar is highly positively correlated with Crude Oil, and the price of both has been reaching new multi-year lows. The Australian dollar is also highly positively correlated with the price of several mineral and precious metal commodities. At the moment, it is minerals such as iron ore which are in trouble, and that is dragging down the price of the Australian dollar.
There is a lot less consensus on the subjects of the two biggest global currencies after the USD, the Japanese Yen and the Euro.
For a few years, the Japanese Yen has been seen as both fundamentally weak, due to Japan’s serious structural economic problems, and also a currency whose government and central bank both want to see weakened. Recently the second half of that statement has been seen as less true, but it is increasingly appearing as if the Japanese authorities are quite happy with the level that the Yen has already reached. The Yen is also being seen by the market more and more as a “safety” currency, so when the markets go into “risk off” mode, money flows into the Yen and the currency strengthens. Taken together, these factors make short JPY a much less attractive trade, or at least a braver trade. Opinion among the most respected analysts is quite evenly split on the Yen regarding whether it will strengthen or weaken over the year to come.
The Euro is another open question, with the ECB recently disappointing those who were looking for more quantitative easing, which quickly pushed the EUR/USD pair as high as 1.1050. The real question now seems to be whether economic recovery in the Eurozone will arrive quickly and strongly enough to continue at least a slow upwards grind for the Euro. If so, parity with the USD will be unlikely to happen any time soon. Volatility in the Euro also looks likely to increase as it has become a currency of choice for carry trades. The meteoric rise earlier this year in the EUR/USD pair from 1.0800 to 1.1700 was highly unusual behavior, but fast moves like this might become more common.
Turning finally to China, a majority of analysts do appear to see a weaker renminbi over the course of 2016. How weak exactly is a matter for furious debate, exacerbated by the obscurity of Chinese economic statistics. If the Chinese economy slows down heavily, this could impact strongly upon recoveries in emerging markets, which in turn would be likely to weigh on the U.S. and blow the Fed’s program of monetary tightening off course, or more probably, slow it down. A slowing China also weighs heavily upon the Australian dollar.
Pulling the threads together, it becomes obvious that the weightiest issue ahead does look to be China. A stronger Chinese economy will suggest stronger Australian and (even more so) U.S. dollars, and stronger stock markets too.
