The year under the sign of QE

In Europe, the deposit rate has been lowered to -0.3% from -0.2%, the Euro QE term of operation has been extended until March 2017

Overall disappointment from the qualitative easing programs can be considered as the main market result of the year. Actions taken by ECB remained unnoticed because of empty rhetoric and political crises, the increase of US interest rates became the regular protection of image, and despite the large-scale support measures, the Japanese economy is not coming back to life. Logically, the period of soft monetary policy in the main countries is coming to an end, and therefore, 2016 must become the takeoff year for the blossoming of the global economy.

In Europe, the deposit rate has been lowered to -0.3% from -0.2%, the Euro QE term of operation has been extended until March 2017, regional and local bonds became engaged in buying up. Investors expected more large-scale measures (increase of QE volume by 15 bln euros per month and/or decrease of refinancing rate); however, Europe is not ready for it. The current ECB decisions are the first signal for possible discrepancy of its monetary and credit policy course with that of FRS.

The following can be noted as forecasts:

  1. European analysts hope that unprocessed 2015 forecasts will be processed next year. The qualitative easing keeps on having positive influence on the stock markets, and the most optimistic analysts expect some growth about by 23-25%, which will lead to the return of the capital to Eurozone and the growth of EUR/USD.
  2. The US usually does not show any growth in the first quarter of the year, and that is why FRS is ready to make a pause, which must lead to the growth of EUR/USD exchange rate. The forecasts regarding the expansion of ECB's asset purchase program in 2016 are quite weak, moreover, that is impossible without the ECB's mandate for the redemption of each issuer's share.
  3. The main risks for euro are of geopolitical nature. Next year, Finland will be expected to adopt the decision regarding the referendum for leaving Eurozone, and Britain, as early as in June 2016, will make the decision regarding leaving the EU, although the likelihood of leaving is very low because of crossflow of capital.
  4. The driver for the growth of EUR/USD may be the cancellation of EU sanctions against the Russian Federation in summer 2016.

The recovery of Japan has been postponed by one more year. The latest statistics shows the growth of unemployment level from 3.1% to 3.3%, and retail sales showed the biggest fall (1%) since the tsunami in Japan in 2011. Industrial production in November decreased for the first time in three months, household expenses fell by 2.9% on the annual basis (the worst result since March 2015).

All the Abenomics attempts turned out to be fruitless. The priorities set by the BOJ leadership relate mainly to the stock market, which, along with the Bank of Japan's account balance showed practically vertical growth from the date of the start of stimulation. New injections of almost USD 800 bln to be made from April of the next year and the extension of the term of purchase of Japanese Government Bonds (JGBs) is the last hope to support the weak economic growth. Predictions are mainly weak. The further expansion of stimulus measures depends on:

  • growth of salaries, the negotiations regarding which have been planned for spring;
  • indicators of the US economy growth and the perspectives of rate increase;
  • devaluation of yuan and the tendencies of the stock market;
  • and also, on the internal factor - the amount of loss of the national pension fund GRIF.

For the first time, American rates have been raised in case of inflation much lower 2%, and in case of the fall of manufacturing PMI below 50 points, although the necessity is long overdue since the liquidity volume has grown to critical amounts during three QE programs. FRS is openly connecting the future of the monetary and credit policy with the incoming economic data, and the latest data regarding GDP and inflation along with labor market data do not show any stable positive dynamics. Oil prices have affected not only the US energy sector but also financial. The present oil prices are 55% below the levels at which bank stress tests were conducted one year ago; and therefore, next year, FRS will put banks with the assets worth of 50 bln dollars, including the subdivisions of foreign banks in the USA, through more rigid tests because of their dependence on the oil market.

The main risks in 2016 are associated with China. Slowing down of its economy is quite logical but the problem is in its manipulation with statistics, especially with GDP, which is underreported in the period of growth and grows unfoundedly in the periods of recesses. Next year, the increase of FRS rates, improvement of US balance of payment, and strengthening of US dollar will increase the pressure on the areas of the Chinese economy with high shares of loaned money. For several previous years, the policy of yuan strengthening forced investors to carry out unhedged loans in US dolar bonds, and now the majority of companies try to ease the risks with the help of repayment of such debts. China's tough policy promotes slowing down of the growth of its partners, fall of prices for raw materials, and triggers regular crashes of regional stock markets.

December turned out to be extremely busy. Besides the results of meetings held by all he central banks of the world, the dynamics of oil prices continues to put pressure on the market. The fact that in December 2015, the managers of hedge funds and other large participants of the market closed the largest volume of short positions in US treasury securities in four years will hardly speak in the favor of US dollar. Real response can be expected by the end of January, which can shift the focus of attention to FRS again - its meeting will be held on January 26-27. New rates are not expected; however, the details of the December Protocol can make the market nervous.

EUR/USD keeps its focus of attention on mark 1.1000 in the range of strong levels 1.0891-1.1020 protected by market makers. We can determine the meaningful range of mid-term support for yen: 120.50-119.50, but the stronger scenario is for fall. The main technical targets will be determined only next week.

Author: Lachlan Patel,
ForexChief Currency strategist