BY JAMEEL AHMAD
THE market news in February continued to focus strongly on the oil markets, with headline attention remaining on the commodity and more specifically OPEC after four members of the committee group agreed to freeze their production levels. The aggressive oversupply in the markets continued to weigh on investor sentiment however, and acted like an anchor on the price with WTI oil dipping back below $30 within a week. WTI Oil did however encounter a far more positive end to February with the commodity rallying towards $35 at the end of the month. $35 is seen as a strong psychological level for WTI and if the commodity manages to close above this level, it would open up the gates for further gains towards $40.
As if that wasn’t enough action in the commodities markets, Gold was back in the trading spotlight, charging from 1127 USD on February 1st up to 1247 USD by the middle of the month. The Gold price was driven higher by safe-haven buying and a bearish outlook on other assets like currencies and equities, with the high level of volatility encouraging extreme Dollar weakness on the hopes that the Federal Reserve would postpone any further increases in US interest rates.
The other main headline was significant Dollar weakness, which allowed the Euro to climb significantly higher against the Dollar. The EURUSD jumped out of its 1.07 – 1.10 trading range set in January on the Dollar weakness, with the Eurodollar extending to a peak at 1.1375 by the middle of the month.
The major loser of the currency markets since the beginning of the year has however been the GBP, with the GBPUSD falling from 1.49 at the beginning of January to a six-year low around 1.3835 in February.
The GBPUSD has suffered from a horrendous period of weak investor attraction since 2016 commenced, with the British Pound falling heavily on the back of repeatedly pushed back UK interest rate expectations, prolonged weakness in inflation and signs of UK economic momentum slowing down. Investors then received even further encouragement to price in additional declines into the British Pound following UK Prime Minister David Cameron finally confirming the date for the EU referendum in late June, which has basically plagued the UK economy for months of uncertainty ahead.
The emerging market currencies saw their fair share of volatility and bearish markets. The USDCNY moved from 6.5770 to 6.4969 by mid-February, as China’s central bank continued spending its way out of the currency war. Sentiment swung against the USD as investors viewed the latest statements by Federal Reserve Chairwoman Janet Yellen as not only dovish but practically sparrow-like.
After the People’s Bank of China (PBoC) hurt investor confidence by weakening the RMB by an alarming rate at the beginning of the year, the RMB has regained some stability and is trying to recover losses against the Dollar. With the China economy still suffering from a decline in growth that is set to continue throughout 2016 and uncertainty remaining over capital outflows and a recent cut in outlook from leading ratings agency Moody’s, I would still say that I remain bearish on the future trend of the RMB. Unless there is an exception Dollar sell-off, or return to riskier assets like the emerging markets from investors I still believe it is possible that the USDCNY will slowly move towards 7.00 by the end of the year.
The Indonesian Rupiah benefited after Bank Indonesia decided to cut its key interest rate to seven percent and revised its 2016 GDP growth outlook upwards. The USDIDR currency pair went through continuing volatility, ranging from a high of 14057.9781 to a low of 13300.2129.
The Indonesian Rupiah has encountered a much more positive start to the year in 2016, and it currently appears that investors are reacting positively to the interest rate cuts from Bank Indonesia (BI). With headline inflation trending lower and the Indonesian economy also seeing GDP growth fall, lower borrowing rates should encourage corporations to borrow from banks and drive consumption higher. There are also reports that the Indonesian government is considering easing the rules for FDI investment, which would attract investors towards Indonesia and also hopefully encourage capital that could encourage further gains in the Indonesian Rupiah.
Nigerian demand for foreign currency reached new heights in February as unofficial exchange rates for the USDNGN went as high as 400 USD, according to news reports. Investor uncertainty over low oil prices and a lower-than-expected growth rate for the third-quarter of 2015 pressured the national currency. Officially, the USDNGN fluctuated between a high of 199.4499 and a low of 198.0495.
There is a great deal of concern in Nigeria over such prolonged depression in the price of oil and with the Naira suffering as a result, it wouldn’t surprise me if Nigerians are increasing their demand for foreign currencies. The lower price of oil is not only leading to lower economic growth, but also hurting government revenues and this could lead to a reduced government budget in 2016. The only way back for a recovery in the Naira rests on a recovery in price for WTI Oil, which is a difficult one to be optimistic towards because the oil markets are being weighed down by external factors such as an aggressive oversupply in the markets and this is something that is out of the hands of Nigeria.
The Malaysian Ringgit came under heavy pressure as the rout in Asian stocks spread through the region. However, there was a bright spot when the oil-producing majors made their announcement, and the USDMYR had some relief from the pressure, ranging between 4.1125 and 4.4094.
The Malaysian Ringgit suffered through a heavy period of turbulence as a heavy sell off in the major Asian equity markets spread through to hurt local markets in the Asian region. The Malaysian Ringgit has however shown some signs of benefiting from hope that the price of oil is attempting to stabilize and recover momentum, and also following a pause to the heavy sell-off in the equity markets. One thing to consider moving forward for the Malaysian Ringgit would be the future intentions of the Federal Reserve because if the central bank did pause on their commitment to continue raising interest rates in 2016, we could see some increase in risk appetite for the emerging markets.
The UAE saw foreign reserves plummet by 12 billion USD, mainly due to lower Oil prices. As OPEC acted to freeze Oil output, the upwards tick in the price will hardly make up for the losses in 2015. The USDAED moved in a tight range between 3.6722 and 3.67335 throughout the month.
While FX reserves are falling in the UAE, the major headlines over falling government revenues is in Saudi Arabia and it is also in Saudi Arabia that we find the future of the Riyal-Dollar currency exchange rate come under question. We think that the USDAED might have now peaked following exception gains for the Dollar in 2015, but foreign reserves in the UAE are still likely to continue moving lower with the chances of a significant comeback in the price of oil looking low at this point. If WTI oil managed to close above $35 during March, then we are looking at an increase in potential for a price recovery in the commodity and this might limit the amount of questions floating around regarding the future of some GCC/Middle-Eastern currencies that are pegged to the Dollar.
Rising concerns over Pakistan’s debt-to-GDP ratio and weakening creditworthiness are pressuring the USDPKR, which saw a low of 104.0200 and a high of 105.0100. Debt-to-GDP is heading towards 65 percent at 70.2 billion USD, estimates the IMF. The underlying fundamentals are looking more -precarious given that - at the last-measured level of 4.7 percent for the year 2014 - the country’s GDP continues to lag behind its regional rivals.
Wrapping up, the continued concerns over China’s slowdown and its worldwide impact caused all the major assets with the exception of Gold to remain under pressure in February. As we move into March, stocks, currencies, and commodities may continue to come under similar price pressure.
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>> Jameel Ahmad is the Chief Market Analyst at FXTM.
>> FXTM is an international forex broker which provides access to the global currency market and offers trading in forex, precious metals, Share CFDs, ETF CFDs and CFDs on Commodity Futures.
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