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Markets Extending Rebound ahead of Mario Draghi’s Speech
Written by Jameel Ahmad
(Chief Market Analyst at FXTM)
After a prolonged period of heavy and aggressive selling, equity markets across both the Asian and European trading sessions have commenced the new week positively and are recording gains so far. This has occurred despite the return of China trading after a week of absence following the nation celebrating the Chinese New Year and immediately being met with some dismal trade figures, which has just underlined once again that the economy is continuing to slow. It is therefore appearing increasingly likely at present that the expectations for the China economy to grow by slightly above 6% in 2016 are looking accurate. The negative economic data that was released this morning did not conclude with just China, as it was also announced that the Japan economy contracted by more than expected in the final quarter of 2015.
Basically, there are still risks to the market sentiment out there and there are also still ongoing concerns about the health of the global economy that can encourage another aggressive wave of selling across the equity markets. It is being speculated that the reason for the recovery of losses being seen so far in trading is because of renewed hopes that central banks will continue to ease monetary policy with eyes being directed on a Mario Draghi speech later today. I see this as a risk in itself because the stimulus measures being introduced so far from a variety of different central banks have failed to have the desired impact on their economies.
Dollar continues to look fragile
The USD is continuing to look fragile across the currency markets following the spectacular removal of expectations for the Federal Reserve to further increase US interest rates in 2016 and the even more astonishing suspicions that the central bank might actually be forced into reversing its course and reducing interest rates. I personally find it quite astonishing to think that only two months after an historic interest rate rise that the markets were eagerly awaiting for about a year, that headlines are actually making the rounds that the central bank might be forced into placing rates into negative territory if confidence in the global economy continues to weaken. This in itself is a complete contradiction from the previous stance that the Federal Reserve were completely committed towards normalizing monetary policy.
It wouldn’t surprise me if many out there are now questioning the credibility of the most powerful central bank in the world, because we are only six weeks past those very confident and ambitious comments from members of the Federal Reserve that the central bank intends to raise interest rates around another four times in 2016. To think that we are now publically moving away from displaying that confidence in their economic recovery, to realistically mentioning the possibility of moving into negative interest rates is quite embarrassing. We do expect the Dollar to continue looking slightly fragile to weakness moving forward because any worries in economic releases will continue to alert suspicions that the Fed might shock the financial markets.
If anything, the flattening of Dollar demand is just going to place further pressure on both the Bank of Japan (BoJ) and European Central Bank (ECB) to ease monetary policy once again because they are seeing their currencies strengthen due to Dollar weakness at a time when both economies also need their own currencies to remain competitive as economic growth is being placed into question.
Yuan surges as PBoC strengthen currency
Away from renewed expectations over central banks continuing to ease monetary policy, one of the reasons why the equity markets might be extending their rebound is because the PBoC provided investors with confidence after strengthening the Yuan’s fixing by the most in around three months. The currency has been strengthened shortly following an interview by PBoC Governor, Zhan Xiaochuan where he expressed confidence that capital outflows are normal and the currency is stable which might have also boosted investor sentiment towards China. I personally believe that the trend of the Yuan is going to remain weak throughout 2016 because economic data is going to continue to express that growth is slowing, whereas another risk for the markets to be on alert for is that capital outflows are increasing.
Gold moves back towards $1200
After surging astronomically to its highest level since January 2015 at $1263 following dramatic USD weakness, Gold is withdrawing its gains and looking towards finding support around $1200. Many have been left completely stunned by the revival in the value of Gold over the past week but one thing is for sure and that is that the metal is still seen as a safe-haven, despite this being widely questioned over the past year following investors ignoring Gold as the drama in Greece and uncertainties over the China economy began to unfold. I would personally say that the route of Gold trading moving forward will depend on demand for the Dollar, which basically means that traders need to continue monitoring US economic data and which direction the Federal Reserve really intends to go next when it comes to US interest rates.
GBPUSD looks at risk once again
The Pound/Dollar is looking at risk to another week of heavy pressure following the failure of the currency pair to close trading above 1.4550 last week. We see this as a psychological pivot level for the Pound/Dollar and this is why we expect the selling in the pair to resume as trading for this current week gets underway.
With so many different factors still limiting investor attraction towards the British Pound such as slowing economic growth, repeatedly pushed back interest rate expectations and questions still remaining unanswered regarding a possible “Brexit” referendum there are still many reasons to be negative on the British Pound.
Follow Jameel on Twitter @Jameel_FXTM