2016 started with chaos as a 7% drop in Chinese equities on the opening day of 2016 set the scene for stocks. Global tensions were heightened not only by events in the Middle East, but were exacerbated last night as North Korea successfully tested an H-Bomb, reigniting upheaval in the region.
Although Chinese stocks pulled back today, the effect on currencies was to weaken the Antipodeans, with AUD/USD at 0.7100 and NZD/USD at 0.6650. Many analysts see continued weakness in these currencies into 2016.
Global tensions often see markets flock to USD for safety, but this is already the case, with many participants already holding the greenback due to the rate-hike cycle beginning in late 2015.
Euro data yesterday suggested that despite the massive QE in December, it failed to lift eurozone inflation, and the single-area currency dropped against all of its peers, with EUR/USD at 1.0750, and GBP-EUR lifting from 1.3550 to 1.3660. The fate of GBP will be better known after this morning’s Services PMI, which is expected to weaken. GBP has weakened in recent weeks due to expectations of a later UK rate hike (especially vs USD) - analysts now looking at early 2017 as the best chance of a hike in the UK.
South Africa and CAD currencies have continued their desperate decline, with SAfrica's weak Rand causing the value of its overseas assets to be greater than its domestic inflows for the first time (USD/ZAR at 15.70), and CAD hit by the weakness in global commodity prices (USD/CAD at 1.4000)
In Scandanavia, Sweden’s central bank has given strong signals of upcoming intervention in the FX markets, with the aim of weakening the SEK, with has been harming the economy. A 4% drop in the past 3 days suggests that FX markets are beginning to read into this. A lively start to the year.
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