Some Things for Currency Market Participants to Watch in 2016
January 5, 2016
Brazil, China and Russia
This trio of emerging markets comprises three-fourths of the BRIC group. Not long ago when each of these economies were performing well, the group was seen as the beneficiary in a gradual shift of economic and political influence at the expense of the Group of Seven advanced economies. 2015 was a disappointing year for each, however, and their 2016 outlooks range from ominous to uncertain. Brazil hosts the summer Olympics in August, but prospects are so dire that The Economist chose this issue for the lead story in its first issue of 2016 under the sub-title “Disaster looms for Latin America’s biggest economy.” Stagflation lies ahead. China pulled the trigger on plunging global share prices on the first trading day of the year. The government is trying to engineer an economic transition away from reliance on investment and exports toward reliance on consumption. The shift is proving more disruptive than hoped both to China and the world economy. Russia’s provocative foreign policies are inflaming geopolitical tensions in a number of hotspots and have also been associated with a domestic economic mix of recession, inflation, and extensive ruble depreciation.
At one point yesterday, the DOW had experienced its worse first session of a calendar year since the infamous 1932, when it touched a Great Depression low of 40.56, 89.5% below its high on September 3, 1929. That’s not the company one wants to keep. Fact is the market has performed in lackluster fashion for a long time. Eternal market optimists like to rationalize that the sideways trend of 2015 was an inevitable pause after the uninterrupted rally that began in March 2009. But March 2009 is a poor frame of reference. Why not focus on the January 2000 peak. From August 12, 1982 to January 14, 2000, the DOW climbed 16.9% per annum over almost 17-1/2 years. Compared to January 14, 2000, the rise has averaged 2.4% per year over almost 16 years. Both intervals represent long runs, and the difference between a return of 16.9% and one of 2.4% captures how far the image and expected economic potential of advanced economies have suffered. This blemished record, moreover, has transpired in spite of zero central bank interest rates, and 2016 will provide a test of whether the U.S. economy, unlike many others where higher interest rates were tried, can handle even mildly less accommodative monetary policy.
The U.S. Presidential Election
The Republicans and Democrats have widely different visions and policy agendas. The Republicans are breaking new ground in how to run a campaign, and it would be foolhardy to assume that 2016 will be like 1964. For what it’s worth, the dollar has performed considerably better since 1960 during times when a Democrat was president than when he was Republican. In 2008, the last year when it was certain that the country was getting a new president and when the incumbent was a lame duck, the U.S. and world economies fell completely apart. For background to that eventful collapse, go see The Big Short, which is highly entertaining and extremely informative.
How Low Can Oil Go?
After slumping 46% over the course of 2014, the same question was asked a year ago. After all, oil is a depleting resource for which there will continue to be great demand. Alas, WTI crude fell by an additional 29% in 2015. Like foreign exchange rates, oil prices often defy the logic of conventional wisdom. Governments and central banks rather universally assume that oil gradually recovers in price. Such is an essential assumption behind strategies to lift inflation back to a more desirable pace.
That would be a general price climb of 2.0% or marginally less. By contrast, consumer prices over the past three years have risen at annual rates of 0.9% in the United States, 0.8% in Japan, and 0.3% in Euroland. The most recent on-year increases are lower than those averages.
Typical Dollar Volatility
The dollar traded in a high/low range of 15.8% against the euro, 8.6% versus the yen, and 9.4% relative to sterling during 2015. The width of the EUR/USD trading band was almost identical to 15.7% in 2014, near the mean 13.7% over the past five years but below the 20.8% average band in 2006-2010. The yen’s range was below 10% for the first time among the past 10 years. Cable, as GBP/USD is known, has posted an average calendar year trading range of only 9.7% in the past four years (2012-15). That much less than the 21.9% bandwidth in the five years from 2006 through 2010.
The dollar rose 11.4% on net from end-2014 to end-2015 against the euro but gained just 0.4% relative to the yen. The appreciation during 2014 had been almost identical against the euro (13.7%) and yen (13.6%). Between end-2011 and end-2015, the dollar rose much more sharply against the yen (56.2%) than the euro (19.1%). But over the last decade since end-2015, the dollar climbed 8.8% on balance against the euro but only 1.9% against the yen. In contrast to the Fed, the Bank of Japan and ECB are expected to maintain quantitative stimulus throughout much of 2016.
Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.