Chaos For Currency Markets
2016 has been a challenging year so far for currency markets. Events ranging from consistently poor global stock market performance to U.S. recessionary fears have applied long-term pressure to global growth, and currency markets have been suffering as a result.
Stagnant Or Fall In Borrowing
The U.S. central bank’s decision in December 2015 to raise interest rates by 0.25% was initially seen as a mark of improvement for its economy. However, rising interest rates pose a problem for borrowers, potentially lowering economic activity.
The problem is exacerbated in the Japanese and Eurozone economies, where rates on reserve deposits are, conversely, in the negative territory. Although these were set with the aim of fostering spending, growth is still lackluster, suggesting that monetary easing is not the solution. Although the Japanese yen enjoys its safe haven status in times of turmoil, the euro is less fortunate, subject to poor data from the Eurozone as well as events elsewhere.
Oil Price Volatility
As oil supplies remain abundant, prices remain low. The recent lifting of sanctions against Iran compound the issue, expanding supply. Fears that attribute the fall in prices to a slowdown in global growth, especially in China, could be indicative of a global economy that is sliding into the recessionary zone.
Recessionary Fears
The recessionary fears sparked by U.S. Federal Reserve Chair Janet Yellen’s testimony last week caused ripples in global stock markets. The warning that market turmoil and a strengthening dollar could harm the U.S. economy cranked up potential risks to currencies like the U.S. dollar a notch
The rise in U.S. interest rates has also led to overall dollar strength. All else being equal, this makes U.S. goods and services more expensive for overseas buyers, leading to a strain in the U.S.’s export competitiveness. Given that this could result in a U.S.-led global recession, Yellen’s cautionary note caused jitters in currency markets, and could continue to do so in the long-run.
China, The Wild Card
China’s route on an unprecedented path to a free-floating currency has been decelerated by hurdles such as a slowdown in economic growth. The Black Monday stock market crash in August 2015 spread its tendrils worldwide, causing a decline in global stock markets. Given the country’s secretive nature when it comes to its economic strategy, and even though they have tried to be more informative on the Renminbi’s future direction in recent weeks, the uncertainty stemming from what could happen next has a significant effect on currency market risk.
U.S. Presidential Election
The race that is the U.S. Presidential Election is heating up. Although currency markets have factored in the unknown element of which party could be ruling the nation (and under which President), the ensuring ramifications of the final decision could significantly influence the economy, particularly if the leadership sees a change in parties.
What Next?
As economies continue to battle their way through 2016, currency markets will see risks from the factors stated above, as well as from factors yet unknown. As the economic landscape shifts, so too do perceptions, which drive market movements. As the U.S. economy, earmarked for growth following December’s interest rate hike, appears to be floundering, Yellen’s warning of recessionary risk brings to fore the unknown nature of currency markets, and just how quickly things can change.
http://www.forbes.com/sites/charlespurdy/2016/02/18/chaos-for-currency-markets/2/#7bbbba9958dc