Bulls or Bears? What’s next for the green­back?

Financial Mirror (Cyprus) - - FRONT PAGE -

The USD has plunged by 4.1% in Q1 2016. This marks the cur­rency’s largest quar­terly de­cline in over five years, and it is largely at­trib­uted to a con­flu­ence of fac­tors in the global mar­ket. Chief among them is the Fed­eral Rserve de­ci­sion to go slow on in­ter­est rate hikes in 2016. That Janet Yellen opted for a pol­icy of grad­ual in­ter­est rate hikes over the course of 2016 has not helped the USD. The first and only rate hike in sev­eral years took place on De­cem­ber 16, 2015, and since then the Fed has threat­ened to raise in­ter­est rates if con­di­tions in the global mar­ket and the do­mes­tic mar­ket war­rant such an ac­tion.

It is an in­ter­est­ing set of cir­cum­stances that cur­rency traders and eco­nomic an­a­lysts find them­selves in now; the US is the world’s #1 big­gest econ­omy and the fact that the Fed is con­sid­er­ing rais­ing in­ter­est rates in the fu­ture is an in­di­ca­tion that the US econ­omy is struc­turally sound. The Fed’s de­sire to adopt quan­ti­ta­tive tight­en­ing mea­sures is re­flec­tive of an econ­omy that is on track to per­form well in 2016. And since the US econ­omy is the big­gest, this bodes well for the world. How­ever, an­a­lysts cau­tion that strong cur­ren­cies are not nec­es­sar­ily syn­ony­mous with strong economies, with Ja­pan be­ing a case in point.

A strong USD has been re­spon­si­ble for the poor per­for­mance of com­modi­ties, given that dol­lar strength gen­er­ates in­sta­bil­ity for the global econ­omy. A strong USD makes it dif­fi­cult for for­eign buy­ers to pur­chase dol­lar­de­nom­i­nated goods since it costs more. The Fed de­ci­sion on March 16 to leave in­ter­est rates un­changed has done lit­tle to bol­ster con­fi­dence for the green­back. Var­i­ous cen­tral banks around the world, such as the Re­serve Bank of Aus­tralia have ben­e­fited im­mea­sur­ably from the weak­en­ing USD, no­tably emerg­ing mar­ket cur­ren­cies. The per­for­mance of the USD is such that cur­rency traders are un­cer­tain about the long-term vi­a­bil­ity of the green­back.

The USD en­dured ral­lies over the past 50 years that were sub­stan­tially greater than the 32% ap­pre­ci­a­tion of the green­back since 2011. In the late 70s, the dol­lar rally be­gan with the nam­ing of the new Fed Chair­man Vol­cker. It con­tin­ued right through un­til the early 1980s when the Plaza Ac­cord was an­nounced. That dol­lar rally lasted for 67 months. Then a dol­lar bear mar­ket en­sued right through un­til the mid-1990s. Ru­bin then opted for a strong USD pol­icy and this re­sulted in a Bull Run for the dol­lar for 81 months. This lasted un­til the early 2000s. The dol­lar has since re­bounded for the past 57 months, since 2011. The point be­ing, the dol­lar ral­lies that have taken place over the past five decades have re­sulted in far sharper ap­pre­ci­a­tions than the cur­rent dol­lar rally. But cur­rency traders are not quite ready to pull the plug on the USD. For ex­am­ple, the Stan­dard Bank Group is fore­cast­ing an ap­pre­ci­a­tion of 8% to $1.05 against the euro, and as much as 12% against the JPY over the course of the next 12 months.

Par­tic­i­pants in the forex mar­ket are un­cer­tain whether the USD is ca­pa­ble of sus­tain­ing the strong gains it is made since 2011. The re­cent de­ci­sion by the Fed has many forex traders scratch­ing their heads about the fu­ture di­rec­tion of the cur­rency. How­ever, not ev­ery­body shares the bear­ish per­cep­tion of the long-term vi­a­bil­ity of the USD. The RBS Group is of the opinion that the weak­ness in the USD is tem­po­rary and a re­cov­ery is en­tirely pos­si­ble. The Fed is clearly deeply con­cerned about the state of the global fi­nan­cial mar­kets and it is for this rea­son that it is de­lay­ing rate hikes. The strength/weak­ness of the USD im­pacts far and wide. Many cur­ren­cies are pit­ted against the USD, no­tably the Chi­nese ren­minbi. When­ever China feels that its econ­omy is per­form­ing poorly, it will work to de­value the cur­rency to make the Chi­nese econ­omy more com­pet­i­tive.

In Q1 2016, the USD plunged 4.6% against the EUR, mak­ing this the worst de­cline in five years. The USD was at its highest level against the EUR back in 2003. In the same time, the USD slid 6.4% against the JPY. Var­i­ous bankers and cur­rency traders re­main cau­tiously op­ti­mistic about the prospects of the USD. An im­por­tant yard­stick for the USD is its per­for­mance rel­a­tive to other G 10 cur­ren­cies. On that front, the USD is per­form­ing rather strongly. The Bloomberg US dol­lar index is cur­rently 0.17% lower at 94.456. It has a year to date re­turn of -4.23%, with a 52-week range of 92.621 on the low end and 100.510 on the high-end. Forex traders are dis­tressed about which way to go with the USD in Q2 2016 and be­yond. Some be­lieve that the dol­lar has suf­fered a mi­nor set­back, while oth­ers be­lieve it is a long-term re­ver­sal tak­ing root. The DXY (US dol­lar index) of­fers a trade weighted gauge of the strength of the USD ver­sus a bas­ket of cur­ren­cies. 2016 has been a tough year for this index, and clar­ity re­mains far off.

The Fed’s pur­pose ap­pears to have shifted from be­ing the cen­tral bank of the US to be­ing the mone­tary pol­icy guard dog of the global econ­omy. The Fed, there­fore, has to cau­tiously mea­sure its de­ci­sions against what is right for the do­mes­tic econ­omy (full em­ploy­ment and eco­nomic sta­bil­ity) and global eco­nomic con­di­tions. The world econ­omy is the more press­ing is­sue for the Fed, given the Chi­nese eco­nomic col­lapse in 2015. The Fed acts in a sta­bil­is­ing ca­pac­ity to bring bal­ance to the global econ­omy. In much the same fash­ion as the Euro­pean Cen­tral Bank acts in the best in­ter­est of broader Europe, the Fed acts in the best in­ter­ests of the global econ­omy.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.