Global Currency Trends and 2016 Currency Projections
2016 has not started off great for currencies around the world given the free fall of the China market and given that their volatility is supposed to continue throughout the year. This will prove a challenge to currency values and will make 2016 currency projections difficult, but will provide tremendous opportunity to trade volatility. The market itself is an issue with regard to economic stability in China as their growth continues to slow, but there is potentially an underlying issue that may shape trends and projections in both the equity and currency markets.
All economies slow, but the depth of impact is based on the size of the economy and the reach it has in global markets. China is #2 so the impact has the potential to be severe. Similar to that of the Great Recession in the United States, China’s economic stability is on the verge of collapse into a mirror image of our own financial crisis. Alone, this is bad due to the economic impact, but is at least predictable for purposes of trading.
Where there is potential for dramatic difference between the illusion of China’s slowing and what is reality lies in their currency policies. Specifically, the renminbi has been devalued multiple times by the government and this is cause for warning signs in both the currency and equity markets. Any time a country attempts to stave off financial crisis by manipulating its own currency, things are usually worse than they appear.
By devaluing currency, the government is working to pump money into the system and to provide liquidity to starving markets. Sound familiar? The currency manipulation is not necessarily the issue since most governments use this as a tool to provide liquidity. Where the real issue lies is that we do not know the depth of China’s difficulties and, given the size of their economy and the global weight that it carries, unknown is not good. We won’t know how far down the rabbit hole we will have to go to get to the bottom. Equity markets understand this and the result is 400 point slides.
The problems arise when you combine fiscal weight abroad with overaggressive interest rate hikes here at home coupled with extremely low inflation rates and stagnant growth. Add in a dash of unknown presidential candidates and you have the recipe for potential disaster.
For currency markets and currency projections, 2016 will be highly volatile with a propensity for the dollar to climb against most other currencies due to flight to safety. Additionally, currency manipulation will continue to hamper trade deficits as our trading remains purposefully unbalanced. Bond interest rates are already decreasing as the demand for investor safe haven climbs. Should the pattern continue as expected, traders will see growth in the value of the dollar with downward pressure on the Euro and related currencies. Also, should this trend continue, expect to see government intervention along the way working to inject liquidity, especially if the downward trend on China’s economy continues.
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