Monday, 9 November 2015

FXTM Chief Market Analyst Jameel Ahmad comments on the superb NFP results reviving US interest rate hopes

Just when the markets were beginning to factor into their expectations that the possibility of a US interest rate hike taking place at all in 2015 was declining consistently, the star performer of the US economy with this being job creation came to the rescue on Friday afternoon.  The NFP results inspired a reversal of fresh hope that the Federal Reserve will carry out their repeated pledge to begin raising US interest rates in 2015 after all.

Expectations that the Federal Reserve will raise US interest rates in December have surged following the unexpectedly superb employment report on Friday afternoon, which confirmed that the US economy created 271,000 jobs in October. Not only did the jobs’ report smash expectations by adding nearly 100,000 more jobs than what was forecast, but it also calmed down recent anxiety that economic momentum in the United States was beginning to slow down. 

Resurgent USD punishes Gold
The sudden shift in optimism over the increased possibility of a US interest rate rise in 2015 has spelt danger for Gold, and led to the precious metal tumbling down to a near three-month low at $1085. Gold has suffered from a complete contrast in fortunes as trading in the final quarter of the year has commenced. After jumping by nearly $90 on repeatedly pushed back US interest rate expectations in October, Gold has suffered a reversal and encountered aggressive selling in November. Upbeat comments from Federal Reserve Chair Janet Yellen that a US interest rate rise in December was a “live possibility” have now been complimented by an exceedingly robust US employment report in November.   

The direction of Gold continues to be dictated by US interest rate expectations, and there are no signs of this ending anytime soon. Where Gold concludes the year is going to be completely directed by the US Federal Reserve and there is still some potential for Gold to fall below $1000 before 2016, however the US economic data will need to remain consistent and the Federal Reserve will have to raise US interest rates.

Further signs of weakness in China economy
Concerns over a continuously slowing down China economy were underlined further over the weekend, after China released weak trade figures that have once again highlighted that economic momentum in the major economy is continuing to decline. While exports dropped by just over 6% in September, the major concern is the import figures where imports dropped by over 18%. As repeatedly stated, a slowing down China economy is more of an issue for those economies that are reliant on trade from China, because they are basically going to begin noticing less demand for products from China if they haven’t already done so. 

With economic momentum in China supposed to fall even further next year, I highly doubt that we have witnessed the conclusion of monetary easing from the People’s Bank of China (PBoC) as it aims to improve the country’s economic performance.

GBPUSD drops all the way to 1.50
The GBPUSD is looking incredibly weak and after suffering another technical rejection at 1.55 early last week, the pair now finds itself dangling around its lowest valuation in over six months at 1.5026. Although there was previously optimism that the 1.51 level could be a possible “lower range” for the GBPUSD, sellers have been encouraged to price in further losses after the floor was penetrated late last week.

Technically speaking, the move below 1.51 is key technical move and has heightened the potential for the GBPUSD to trade below 1.50 once again before the end of the year. While at best, it now appears that rallies in the GBPUSD could be capped below 1.53. GBPUSD traders would be wise to continue monitoring the EURGBP because the Bank of England (BoE) once again chose to talk down the Pound once the EURGBP looked vulnerable to falling below the key 0.70 level.

Investor sentiment towards the Pound might also be negatively impacted by the resumption in headlines over a possible EU referendum. It is currently expected that UK Prime Minister, David Cameron will make a list of demands for reforms to the President of the European Council, Donald Tusk on Tuesday, and such talks over a possible referendum do represent a risk to investors. 

Emerging Markets
The timely combination of a potential change in US interest rate policy, continuously depressed commodity prices and consistent concerns over economic momentum slowing down in China is leading to an overall weak investor sentiment towards the emerging markets.

The Jakarta Stock Exchange Composite Index has drifted over 1.5% lower with this being correlated to an overall weak sentiment towards the emerging markets, and possibly the latest GDP report narrowly missing expectations. While the GDP report only narrowly missed forecasts, it might add to the recent uncertainty that the Bank of Indonesia may unexpectedly cut interest rates before the end of the year to improve domestic activity.

It was reported late last month that Bank Indonesia have cut inflation forecasts and expects to see a sharp slowdown in inflation, meaning there is the potential for lower interest rates if necessary.

Despite some really strong trade figures from the Malaysian economy on Friday, the Bursa Malaysia has opened trading for the week a little lower. Both the import and export figures from Malaysia were impressive and outlined strong fundamentals and potential for GDP growth. Export competiveness has been greatly improved by the Ringgit weakness and this is leading some aspects of growth. There was also a surprise that the economy imported more than expected in September, which might reduce concerns that consumers are struggling to adapt to less purchasing power. However, it could also just be that consumers are once again importing after the implementation of the GST tax in April.

The potential for the UAE Dirham is looking strong after the US jobs report on Friday afternoon increased optimism that the Federal Reserve will begin to raise US interest rates. While still an emerging market, one of the benefits the UAE has in its possession and other economies with currencies pegged to the USD is less currency exposure. Both the Malaysian Ringgit and Indonesian Rupiah have at times this year been hammered by a stronger USD, but the UAE Dirham has this to its advantage.  

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