Spring avitaminosis of the market

Current week will be focused on the data from the US, which will be available by 16 March 2016 when the FOMC meeting will be held

Last week provided a standard set of ideas for normal market activity. The US data positively affected the market but the FRS attempt to suspend the interest rate increase with regard to global risks led to the growing panic in the market. The G20 summit did not influence the market significantly, as opposed to the EU policy, which in fact did. The current market situation surrounding the debate on Brexit seems to calm down. The majority of the market players hedge GBP currency risks by selling the assets. Mark Carney suggested that the pound had fallen due to announcing the date of the referendum on the UK membership of the EU but that «the possibility of a risk premium being attached to UK assets, because of certain developments», had existed.

Sterling would recover its potential for growth if the UK has remained in the EU. The possible positive outcome of the referendum would attract the investments to British assets and the Bank of England might have increased interest rates by the end of 2016. Nevertheless, any referendum causes uncertainty and the traders would purchase the pound if the surveys have revealed that the supporters for UK’s staying in the EU outnumber their opponents.

Current week will be focused on the data from the US, which will be available by 16 March 2016 when the FOMC meeting will be held. Strong NFP with continuous rise of salaries facing the increase of the inflation in the US provides more opportunities for increasing the interest rate in April, otherwise the interest rate will be raised at least in June. Regarding abovementioned circumstances, EUR/USD can be traded lower even before FOMC meeting takes place. Moreover, the routine meeting of the Board’s of Governors of the Federal Reserve is announced to be held on 4 March to establish single-counterparty credit limits for large U.S. bank holding companies and foreign banking organizations. On this meeting the Board of Governors will have to choose between securities market increase and the decline in the USD exchange rate.

The first day following the G20 Shanghai summit was marked by weakened Chinese securities market, even though the agenda of the summit was not taken into account by the market players. By the end of the summit, such risks as the decline in commodities’ prices, the change of direction of capital flows, the growth of the political tensions, refugees’ issue, relationship between the UK and the EU had been outlined. Nevertheless, the nervous market reaction on current events was assumed not to be based on reasonable grounds.

There was a debate regarding concurrent devaluation of the securities of Japan and China. It was admitted that no monetary policy can lead to the balanced growth. To that end, G20 states agreed to inform each other of further devaluations (actions without prior consultation with G20 states would constitute the breach of the agreement). However, it is unlikely that these rules would be complied with.

Trading USD/ JPY in the beginning of current week had been remarkable. On 29 January, the Bank of Japan had made a decision to adopt negative interest rates, which in effect imposed charges for financial institutions for parking excess reserves with the BoJ. Unsuccessful Japanese negative interest rates’ policy led to the undesirable growth of the yen and the market uncertainty. The mechanism of the stimulating and functioning of the bank system faced dramatic difficulties – the Japanese banks almost ceased to debt-fund each other, a short-term interest-rate swap dropped to its minimum, an interbank activity experienced 79% decrease falling to ever recorded low of 4,51 billion yen ($40 billion), interest rate declined by 0,01%, and is slightly higher than (-0,1%) now. Facing bank volatility, the demand for gold keeps growing in Japan – private investors continue to seek low risk assets. Probable criticizing actions of competent authorities regarding securities market can serve as a ground for extension of incentives anticipated by the market on the meeting on 15 March 2016.

Additionally there should be outlined the following:

  1. German data on inflation again are higher than it was expected, while the inflation expectations of the Eurozone will be 1.40 per cent lower in 5 years perspective.
  2. New negative data from China had not led to active dynamics of the securities market.
  3. There will be elections in problematic EU countries: there can be re-elections in Ireland and motion of no confidence in Spain.
  4. Euro remained under pressure on Friday, whereas a low inflation rate and a trust to investors would enable the European Central Bank to strengthen the policy next month.
  5. NBC cut down the norms of the mandatory bank reserves by 0.5 per cent after closing state’s markets on Monday - the reserve coefficient of the majority large Chinese banks amounts to 17%.
  6. The member states of the Co-operation Council for the Arab States of the Gulf due to the oil prices fall in next two years will have to re-finance almost $100 billion ($52 billion in bonds and $42 billion in syndicated loans), and the UAE and Qatar will have the largest burden. In contrast, Saudi Arabia ceased to be the capital exporter – it does no longer buy the assets but sells them.
  7. The USA are threatened by the largest wave of defaults the oil companies. The debt of Energy XXI Ltd. and SandRidge Energy Inc. amounts to $7.6 billion and the interest will be due for repayment by the middle of the next month. If these companies fail to repay the interest, they will have to negotiate the debt settlement with the creditors or initiate bankruptcy procedure.

EUR/USD: traded in wide range: 1.0960/1.0842. Strong intraday resistance: 1.0855/1.0900 and 1.0914/1.9500. It is only the support zone, which is lower: 1.0805/1.0856.

USD/JPY: traded in range 112.98/113.49 - trading lower/higher will determine the main risks. The nearest support zone, which is lower than abovementioned zone: 112.41/112.02/111.64. Further statistics data is required to determine the main direction.

Author: Lachlan Patel,
ForexChief Currency strategist