Fibogroup Market Analysis 2017

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Overview of the key events of 2016

Throughout the year, the FIBO Group shared the current news from the world of finance and the opportunities they could use in their trading. 2016 is approaching its end. A year of radical change and historically important decisions. The most significant events of 2016 are presented for your attention.

Trump

December 8-9, 2016, during one of the most intriguing new elections in the history of the United States of America was elected. Donald Trump, having received more than 270 needed electoral votes, was elected the 45th president of America. January 20, 2017 will be the official inauguration of the new head of the White House.

During the election campaign Donald Trump promised to permanently abolish many of Obama's decisions, in particular "cancel and replace" the health care reform, abolish restrictions on the production of hydrocarbons, raise the middle class. Looking at the actions taken by one of the world's most famous multimillionaires, we can assume that it is aimed to fundamentally reshape the political and economic view of the world.

The financial world has reacted quite violently to the event: The US indices (DJIA, S & P) have updated their historical highs; the US dollar has become stronger in relation to all the major currencies.

Oil

At the end of 2016 we can safely assign the highest rating among the other crude oil assets: the most volatile and the most speculative instrument. Through verbal interventions made by the representatives of the world of energy, quotes were soaring and falling by more than 30%. In the end, a significant step on the path of global cooperation was made on November 30, 2016: the OPEC member states agreed to reduce oil production by 1.2 million barrels per day - up to 32.5 million. This is first time since 2008 that the countries decided to take this step.

As a result of the oil price increases, which has had a positive impact on the world market conditions. And it allows you to make money.

Brexit

Britain has always kept aloof in the European community. When on June 24 it became known that almost 52% voted for the UK's exit from the EU, Prime Minister David Cameron resigned, the national currency depreciated by 13% in one day, and there was an unprecedented volatility in financial and commodity markets. Britain, by the way, lost its top credit rating, from "AAA" it fell to "AA", and the Bank of England immediately cut its interest rates.

An unprecedented disintegration event in post-war Europe caused a lot of comments: How it will affect the interests of the EU, USA and Russia.

Flash crash

On the morning of October 7, all the merchants of the world were short of 500 points in the GBP / USD currency pair. Such a sharp change in a split second just could not be true. Nobody believed that additional information sources had to be referred to in order to verify the information. But trading terminals around the world noted the same thing - for a few seconds an unknown trader "hit the quotes glass" so hard that the markets could not stand this pressure. Once again, the financial market has proven that it is only partly predictable and depends on many unpredictable factors. It is this "imperfection" of the market architecture that creates a precedent for similar cases.

The US Federal Reserve Interest Rate

The US Federal Reserve has implemented a script of "aggressive tightening". The regulator has not only raised the rate by 25 basis points, which was to be expected, but also raised its forecasts for the rate rises to three in 2017. The economic forecasts made by the members of the Federal Open Market Committee have also improved, adding to the overall picture of the finishing touch in bright colors. In other words, the market now has sufficient motivation to buy the dollar now and forever.

The EU interest rate

The ECB entered into in 2016 with a 0.05% refinancing rate and reduced it to a record low 0.0% as early as March 2016. This level is maintained to this day, as the main subject for the markets is the fate of the so-called QE stimulus program, which the Bank uses in parallel to the zero rates.

Japan's interest rate

For the first time in history, the Bank of Japan has set a negative interest rate as a measure to combat the deflationary process, which against the background of an additional and constant emission knocked down the yen by 300 points. Currently, Japan's economy benefits from a weak exchange rate of the national currency - exporters rejoice. Analysts say in one voice about the good prospects for economic recovery with the current low rate of the national currency and a negative key rate.

New Zealand's interest rate

In 2016, the Reserve Bank of New Zealand cut its benchmark interest rate to a record low of 1.75%. It should be noted that against the background of the 2000-2008 period, the rate was really very low (7.00% was the norm). At the same time the bank had three systematic declines this year and only the first one (March 2016) carried a surprise factor. The subsequent ones were also developing according to an already developed scenario and created opportunities for earnings.

 

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US drillers enjoy higher oil prices

In a surprise move pulled off late last year, it has been revealed that U.S. drillers hedged their bets last year against falling oil prices, which is likely to add more pressure to the oil price and push the OPEC cartel into more production cuts.

A report by consultancy group Wood Mackenzie showed that American firms rushed to lock in higher prices when oil was trading significantly higher last year which seems to have turned out to be a a clever move.

The practice of Hedging oil protects buyers against falling prices as they are able to lock in a price to at the time of the agreement (in the case of US drillers when the prices were much higher last year) and then sell to the market at the agreed price.

A major stumbling block for OPEC in the quest for further production cuts is Non OPEC member Russia, who have so far reneged on the last deal by only agreeing to cut half of the oil supplies they signed up for.

If they don’t jump on board with the new agreement other countries are expected to follow suite meaning the deal will fall apart and the oil price is likely to tumble further.

However, if they do come to the party and agree to further cuts and stick with their promises we could see a substantial lift in the oil price and a new bottom for the foreseeable future,

“The onus is now on Russia to show they’re serious about this, If Russia come to the fold with non-Opec, we’re going to see a floor around $60 a barrel.” noted Mercuria chief executive Marco Dunand.

Analytic FIBO Group

 

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The Australian dollar came under further pressure last week after Moody’s ratings agency downgraded China’s long-term credit rating, which raised questions about the economic health of Australia’s largest trading partner.

This was China’s first downgrade since 1989, with Moodys warning that the government’s push to keep up existing growth levels will leave the country full of Debt and weakened financially.

Investors have been concerned over China for some time and many believe that the economic growth that China has experienced over the past decade or so is unsustainable and this may be a sign of things to come,

“Because Australia is so tightly linked to China in terms of its exports then any threat to China’s growth outlook is a negative for Australia .We’ve seen a knee-jerk reaction in the Aussie to Moody’s report” noted Westpac senior currency strategist Sean Callow.

Also hurting the Aussie dollar last week against its US counterpart-narrowing gap for 10-year government bonds offered by the Australian and US governments.

The difference is now just 0.16 points and the last time the yields were so close the Australian dollar was trading below US50c so a substantial correction may be in the making.

The Australian economy is seen as more risky than the US economy and investors expect higher returns, which they have enjoyed for more than a decade, but with this coming to an end, the Australian dollar is bound to tumble

"We're spending a bit too much time saying inflation isn't high, therefore the RBA doesn't need to hike. We all know the RBA wants a lower currency. But you have to be careful what you wish for.” Noted TD Securities' chief Asia-Pacific macro strategist Annette Beacher

"If the Fed hikes three or four times, and the RBA sits tight, we won't be high-yield. That doesn't mean the Aussie falls to US72¢. It means it collapses to US62¢. And think of the inflation shock that would cause." She added.

 

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The Australian dollar has continued its winning streak today, racking up a 4th straight day of gains on the back of better than expected GDP figures which dimmed expectations of a rate cut in the nearest future.

Gross domestic product rose by by 0.3 percent in the 2nd quarter of the year bringing the total to 1.7 percent from a year earlier as reported by the Australian Bureau of Statistics.

The figures came in above analysts’ expectations and may be enough to keep a rate cut off the table for the time being.

The news follows on from yesterday’s decision from the RBA to keep interest rates on hold at 1.5 percent and the following statement they provided showed they were in general, satisfied on the direction the economy was heading, especially the jobs market,

Indicators of the labour market remain mixed. Employment growth has been stronger over recent months, although growth in total hours worked remains weak. The various forward-looking indicators point to continued growth in employment over the period ahead” noted RBA governor Philp Lowe.

With the Australian dollar now sitting comfortably above the US75c mark some believe it’s a good time to sell as the threat of higher interest rates in the US and lower commodity prices are expected to bring the local currency under pressure,

"With the Fed set to raise rates next week and commodity prices expected to weaken as we move through the end of the year, strength into the US75.00¢/75.50¢ region is seen as a sell opportunity." noted Westpac chief currency strategist Robert Rennie

 

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The oil price moved significantly higher today before pulling back in the American trading session after reports that Saudi Arabia plan to reduces the amount of supplies to the market

At 8.02pm (GMT) the WTI crude oil was trading at $46.02c after trading as high as $46.70 earlier in the day.

There are rumors swirling in the market that Saudi Arabia, the world’s largest oil supplier plans to cut oil exports to Asia by 300,000 barrels a day as well as cut overall supply to the US by around 35 percent in order to boost prices.

The news was initially good for the oil price but worries continue to persist about the amount of oil production coming out of the US with new rigs coming on line on a weekly basis.

“There is still a risk that U.S. inventories, shale production will offset the efforts from OPEC nonmembers when it comes to trimming the oversupply in the markets,” noted Jameel Ahmad, Vice president of market research at FXTM”

According to today’s prices, oil is at about fair value with plenty of buyers waiting to step in should the price move any lower but they should expect the price to shoot significantly higher for big profits,

"When you start to approach $45 a barrel in WTI, you're in an area where you do find some price support and I think there has been some evidence last week of investment flows coming back into crude oil,"said Petromatrix strategist Olivier Jakob.

"You have to be careful not to be too optimistic for now," he said. "Physical differentials are still under pressure and the time structure is still under pressure in Brent. It's a bit premature to call for much higher oil prices." he added.

 

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The pound is in recovery mode today after strong local data out of the UK provided a much needed boost for the currency, but the party may be short lived as the market gears up for tomorrows interest rate decision from the US Federal Reserve and a possible leadership battle in the British parliament.

At 7.38pm (GMT) the British currency was trading at $1.2763 up from $1.2674 in yesterday’s close.

Headline inflation in the UK rose 2.9 percent year on year, marking its highest level in 4 years, and was mainly attributed to the falling pound of the back of Brexit.

The figures may have gone someway to helping the pound but wage growth, which was also reported, rose 2 percent which means against inflation, real wages are falling, which in the long term is going to hurt British consumers.

In the coming days, political turmoil is going to create volatility in the pound as Prime Minister Theresa May attempts to form a coalition government which until now is proving difficult and some say is too late, and it’s only a matter of time before she resigns,

“There is great uncertainty whether May survives as prime minister, but it is not clear either who would replace her and if they have greater support about the Tory base,” said Brown Brothers Harriman currency analysts, led by Marc Chandler

Tomorrow is also a big test as the US Fed gears up to raise interest rates with the market predicting a rate rise of 25 basis points as a foregone conclusion that is already priced into the market so all eyes will be on the following monetary statement.

If the speech is bullish, analysts predict further rate rises this year and the pound is likely to give up today’s gains and then some,

“The Fed is likely to hike the interest rates further in the two-day meeting, but investors want to understand the Fed’s perception of the U.S. economy and whether it feels it is robust enough to mandate a future increases through 2017 as proposed earlier,” said Mihir Kapadia, CEO of Sun Global Investments.

“Higher interest rates would shift balance of market demand to the dollar.” he added, which would be terrible news for the pound.

 

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The gold price has surged higher in late European trading today, travelling in the opposite direction of the US dollar as a round of disappointing data out of the US just before the Fed’s interest rate decision and a shooting in Virginia spooked investors.

At 3.32pm, (GMT) gold was trading at $1,277 up from $1,266 in yesterday’s trading.

Retail sales figures release from the US earlier today came in at -0.3 percent against predictions for a figure 0.1 percent and comes just hours before the US Federal Reserve are widely expected to lift interest rates.

Consumer price index figures also disappointed investors coming in at 1.9 percent, slightly below expectations for a figure of 2 percent but more importantly, decisively below the 3 percent figure the trump administration has promised.

The Fed now has a dilemma on their hands and although they will lift rates later today, the following monetary speech is likely to be bearish, and gold may receive its 2nd boost of the day as further rate hikes may be off the table this year.

"If the Fed hikes, it will most certainly be followed by a dovish comment," Saxo Bank's head of commodity research Ole Hansen said.

"Either way it could signal the end of the latest gold retracement, which has been healthy and not that deep considering the speculative length that was added during the past few weeks." He added.

Also boosting gold’s appeal as a safe haven asset was a shooting earlier today at a baseball game in Virginia where the wounded included 2 police officers and Whip Scalise, a US congressman which caused chaos at the stadium.

 

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The Euro has continued to tumble today, still reeling from yesterday’s bullish Fed speech and some believe that further losses are on the cards.

At 4.34pm (GMT) the European currency was trading at $1.1132 after trading as high as $1.1302 in yesterday’s trading.

At their latest board meeting, yesterday, the US Federal Reserve hiked rates by 25 basis points which was widely expected by the market, but it was the following monetary statement which caught investors off guard.

In her speech, Fed president Janet Yellen noted that overall she was happy with the direction of the US economy including the jobs market and inflation was also picking up which seemed to go against the recent release of economic data from the US

The Euro as well as most of the major currencies took a hammering after the speech and some mentioned it was well due for a steady correction.

The euro got a bit overextended on the recent run higher as it ran out of new good news to take it higher and the European Central Bank did its utmost to dampen expectations for the beginning of any asset purchase taper," John Hardy, Head of forex strategy at Saxo Bank,

How much further the Euro can now fall is anybody’s guess, but with the Fed poised to lift rates higher later in the year and the European Central Bank expected to keep rates on hold the potential for big losses is highly possible

"That's all the Fed. With the Fed, people were expecting a little more dovishness," said Martin Arnold, Global FX & Commodity Strategist at ETF Securities.

"I think we are close to seeing a near top for the euro and a near bottom for the dollar." he added.

 

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The Australian dollar has made a strong recovery in the last 2 weeks against its US counterpart, trading off a low of $US73.60 to around US76.00 today but the question is where to now for the currency?

Two of the main reasons behind the comeback are the recovery in Iron ore prices, Australia’s biggest export, as well as growing expectations that the US Federal Reserve will not lift interest rates as high as earlier anticipated.

With Iron ore around $56 a tonne the Aussie dollar may remain well supported if the prices keep moving higher as miners in Australia continue to pump out higher levels to take advantage of bigger profits.

If there is a reversal of trend, it may cause a domino effect and countries from all sides of the globe will feel the squeeze,

"As prices approach $US50 per tonne, we may start to see lower output from Russia, Canada and Ukraine. When prices approach $US45 per tonne, high-cost Australian and Brazilian miners could be under pressure to cut," the analysts said in a report.

The US Federal Reserve hiked interest rates last week by 25 basis points as was widely expected by the market but it was the following monetary statement that grabbed everybody’s attention with some analysts now believing that the Fed will cut back on the number of rates hikes this year with the possibility that there will be no more.

Some in the market were surprised that the Fed even lifted rates this time around, as the recent economic data out of the US didn’t warrant such a move.

In a speech yesterday Chicago Federal Reserve President Charles Evans noted that it would be prudent for the Fed to wait until the end of the year before moving on rates again.

He highlighted that inflation is well below the central bank’s target rate of 2 percent and further rate hikes are not yet justified, "I don't see why we would not be served to allow more time to wait," Evans told reporters.

 

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The pound slumped to its lowest level today post-election, following on from yesterday’s losses after comments By BOE chief Mark Carney on the question of interest rates.

The British currency began its decline yesterday after Carney noted that the UK economy was not ready for higher interest rates and any such move could derail the fragile recovery.

That goes against some Bank of England board members who voted to hike interest rates last week but were defeated and it shows the deep divide on howc to go forward with monetary policy

"From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment." noted Carney.

Looking ahead, the outlook for the pound also looks dismal and further losses are expected on the back of political instability and with no government formed as yet, Prime Minister Theresa Mays job looks pretty shaky,

“With no discernable progress yet in talks, the market is becoming worried about the prospect of a minority government and Ms. May’s ever-so-tenuous hold on power, just a Brexit talks have started this week, noted Boris Schlossberg, managing director of FX strategy at BK Asset Management.

“Sterling continues its slow motion crash, If “economic data starts to falter, the decline in cable could take it well below the key 1.2500 support level, he added.