Gold, USD, EMs un­der pres­sure as oil sinks to $40

Financial Mirror (Cyprus) - - FRONT PAGE -

Global mar­kets are fac­ing se­vere pres­sure and ex­tend­ing losses with sen­ti­ment be­ing weighed down by a wide va­ri­ety of dif­fer­ent fac­tors with this in­clud­ing China un­cer­tainty, re­sumed con­cerns over the pace of the global econ­omy, de­pressed com­mod­ity prices and in­creased ten­sions over whether these fac­tors are go­ing to en­cour­age the Fed­eral Re­serve to de­lay rais­ing US in­ter­est rates this year.

Now that the price of WTI has fallen be­low its crit­i­cal sup­port at $42 with this in­spir­ing an in­evitable move be­low $40 we are look­ing at the com­mod­ity mar­ket selling con­tin­u­ing and for this to fur­ther weigh on mar­ket sen­ti­ment. The po­ten­tial for Greece risks to steal head­lines once again have also re­turned fol­low­ing the an­nounce­ment of a snap-elec­tion in Septem­ber and when you com­bine all of the above risks, the mar­kets are ex­posed to fur­ther vul­ner­a­bil­i­ties and it is dif­fi­cult to ex­pect a re­bound any­time soon.


Gold con­tin­ues to power through and build on its im­pres­sive rally fol­low­ing the shocks from China and the un­cer­tainty that this could en­cour­age the Fed to dis­tance it­self away from its re­peated com­mit­ment to be­gin rais­ing rates in 2015. Gold has jumped by $70 in un­der two weeks and sta­bilised above the crit­i­cal $1,100 area. This has been a sig­nif­i­cant re­bound for Gold, which would have raised in­vestor sen­ti­ment and in­ter­est from buy­ers while also eras­ing con­cerns that the me­tal had lost its safe-haven ap­peal af­ter fail­ing to budge when the Greece risks in­ten­si­fied a month ago.


The Pound sen­ti­ment seems sta­ble fol­low­ing the re­cent above ex­pec­ta­tions core in­fla­tion read­ing that al­lowed the GBPUSD to fi­nally ex­tend above 1.56. The move to 1.57 late last week was a strong tech­ni­cal move and sug­gests that the GBPUSD can be­gin build­ing on this and set a new trad­ing range to what was lim­ited to the high 1.56 since the mid­dle of July. As long as in­vestors do not be­gin tak­ing profit on re­cent gains, the GBPUSD could be­gin to tar­get a new range be­tween 1.57 and its yearly highs just be­low 1.60.

While the UK econ­omy is slightly more shel­tered than oth­ers when it comes to China risks, the Pound would be vul­ner­a­ble to with­draw­ing gains if the FTSE 100 con­tin­ues to de­cline at the same pace seen last week. While the UK cur­rency is rel­a­tively sta­ble and less ex­posed to risks than oth­ers, it is go­ing to re­quire fur­ther USD profit-tak­ing for the GBPUSD bulls to build up the courage to tar­get the 2015 highs.

Emerg­ing Mar­kets:

The emerg­ing mar­ket cur­ren­cies are fall­ing at a pace that is some­what sim­i­lar to ma­jor global in­dices, with no floor in selling due to sen­ti­ment be­ing con­tin­u­ously pres­sured by dif­fer­ent di­rec­tions. The out­look for these cur­ren­cies re­mains for fur­ther falls with eco­nomic pres­sures fur­ther­ing due to the price of oil fall­ing to fresh mile­stone lows and China risks set to con­tinue un­til at least the re­main­der of the cur­rent quar­ter.

The ques­tion of cen­tral bank in­ter­ven­tion is go­ing to re­main a pop­u­lar topic, but the truth is that the ma­jor­ity of these pres­sures that are pulling down these cur­ren­cies are ex­ter­nal and there is very lit­tle that cen­tral banks can do to end the pun­ish­ment for a mean­ing­ful pe­riod of time.

Pol­i­cy­mak­ers might start fol­low­ing the re­cent lead set by the PBoC/China and the Yuan by weak­en­ing their cur­ren­cies to de­fend ex­port com­pet­i­tive­ness. These mar­kets need to adapt to the fact that com­mod­ity prices are set to re­main de­pressed for a long time, and also that trade with China is more than likely to con­tinue de­clin­ing. Weak­en­ing cur­ren­cies would limit po­ten­tial ex­po­sure to a fur­ther de­cline in ex­ports at a time when these mar­kets are al­ready hurt­ing due to weak com­mod­ity prices and the im­prov­ing US eco­nomic out­look.

De­spite the USDMYR al­ready ex­plod­ing from 3.80 to 4.17 in un­der a month, it is in­evitable that the cur­rency is go­ing to weaken to 4.20 against the USD. This is in­evitable now that the price of WTI has ex­tended be­low $40 and it could hap­pen as early as this week. There re­ally is no floor to Ring­git weak­ness, and if WTI con­tin­ues to spi­ral to the low $30s, the USDMYR will tar­get at least 4.30. The Malaysian cur­rency couldn’t even ben­e­fit from the USD weak­ness over the past few days, which shows a great deal about how weak the in­vestor sen­ti­ment to­wards the Ring­git is at the mo­ment.

The In­done­sian Ru­piah is another emerg­ing mar­ket cur­rency suf­fer­ing from a bleak out­look, and it could hit fur­ther lows against the USD over the re­main­der of the cur­rent quar­ter. The In­done­sian econ­omy will be hurt by both the free-fall­ing com­mod­ity prices and weak­en­ing trade from China, and this is at a time when the econ­omy is al­ready suf­fer­ing from GDP tar­gets be­ing missed. The Ru­piah could be the next emerg­ing mar­ket cur­rency to catch the eye with sud­den weak­ness, and we might be­gin learn­ing about fur­ther gov­ern­ment ini­tia­tives, such as rais­ing im­port taxes and re­strict­ing cor­po­ra­tions us­ing any­thing other than the do­mes­tic cur­rency to pre­vent the Ru­piah from slid­ing any fur­ther.

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