- Yen was the ultimate safe haven, while the US dollar also did well…
- …but currencies of commodity exporting countries sharply lower
Yen ultimate safe haven…
So far 2016 has started off on the wrong foot. The brutal sell-off in Chinese equity markets was initially triggered by a weaker-than-expected Chinese PMI and by uncertainty regarding new and expiring stock market regulation. The move was accelerated by the weaker fixing of the Chinese yuan by the PBoC. The latter sparked fears of a more substantial weakness of the yuan in the making (see our FX Special – Gradual depreciation in the CNY TWI). As a result, the ultimate safe haven in currency markets, the Japanese yen, profited strongly. The yen outperformed the US dollar by more than 2% so far this week: USD/JPY dropped below 118. We do not rule out that further strength in the yen will trigger BoJ intervention. The US dollar was the runner up, appreciating versus most other emerging and major currencies. Going forward we expect sentiment in currency markets to calm down and investors to refocus on monetary policy divergence. Therefore, we expect EUR/USD to decline to below parity this year and USD/JPY to rally to 135.
…but currencies of commodity exporting countries sharply lower
The sell-off in commodity prices, lower Chinese yuan and fears of a more substantial growth slowdown in China pressured currencies of commodity exporters such as the Australian dollar, New Zealand dollar, Canadian dollar, Russian ruble, South African rand, Mexican peso, Brazilian real and Chilean peso. In addition, economic and political challenges as well as the prospect of further easing in some countries have also weighed on these currencies. The South African rand was the weakest emerging market currency mainly because of the recent political crisis, weak economy and sharp falls in palladium and platinum prices. In Asia, both the Taiwan dollar and South Korean won (KRW) weakened given that China accounts for about 25% of their exports. Pressure on the KRW extended due to geopolitical uncertainties after North Korea announced that they successfully conducted nuclear test on 6 January.
For 2016 we see a recovery in Latin American currencies, the Russian ruble, South African rand because of stabilisation of commodity prices and some improvement on the domestic front. In the case of the Australian dollar and New Zealand dollar we remain bearish because of monetary policy easing in the coming months to support the economy. This is not fully priced in by financial markets.