David Long

4 Currencies You Need to Keep a Close Eye on in 2016

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Last year saw two key developments in the currency markets. First, the U.S. dollar has been advancing relentlessly against every major currency, with its biggest gains it has coming against commodity exporters’ currencies. Secondly, the Chinese yuan had a surprising devaluation over the summer that led to a short and sharp correction in global equities.

Since China devalued the yuan again in the first week of January again, global markets are having their worst start to the year in a long time. In other words, you can expect turmoil in the currency markets, particularly in the first part of 2016. With that in mind, here are four currencies to keep a close eye on in 2016:

Chinese Yuan

Even though the U.S. dollar seems to be a force to be reckoned with, in recent months the Chinese yuan has been disrupting the currency markets. The yuan isn’t a floating currency whose rate is determined by market forces. Instead, China’s central bank, the People’s Bank of China (PBOC), uses a “managed float” system to determine its rate against a basket of managed currencies including the U.S. dollar.

China had been allowing the yuan to appreciate gradually over the past 10-year period ending in 2014. This was in part respondent to blatant calls from U.S. lawmakers for the revaluation of the yuan in order to curb the nation’s soaring trade deficit with China. However, since the yuan reached its strongest level ever in January 2014, of six yuan to one dollar, it has been allowed to slide lower as the dollar runs up.

Canadian Dollar

The Canadian dollar, or “loonie” as it is known in the world of Forex, plummeted 16% in comparison to the dollar in 2015. It was the third-worst performing of the 16 major currencies, topping out a three-year slide to a record 28%.

The Canadian dollar’s plunge was caused by a few bearish factors including a recession in Canada in the first half of the year, slowing global growth, two interest rate cuts by the Bank of Canada, lower commodity prices and finally a 30% drop in crude oil prices.

In 2016, the drag created by these factors could ease up, and the Canadian economy is expected to benefit from the monetary and fiscal stimulus and a weak currency. Additionally, the economic strength in other parts of the world like Europe and Japan could offset the slowdown and prove beneficial to the currency.

Euro

The euro came under speculative attack in the first part of 2015, with the crisis in Greece causing alarm in the markets. After the unexpected devaluation of the yuan in August, the euro had to give up its standing on the world stage, forcing it to end down 10.2% vs. the U.S. dollar for the year.

While some currency traders think the euro could fall to parity with the U.S. dollar in 2016, Bloomberg survey participants forecast only a modest weakening in the currency this year, to 1.06 from its current level of 1.08.

Brazilian Real

In 2015, the Brazilian real was the worst-performing of the major currencies, plunging 33% against the U.S. dollar, and since 2010, the real has declined against the dollar by a surprising 58%.

The currency reached a record low of 4.25 against the U.S. dollar in September after Standard & Poor’s cut Brazil’s credit rating to junk status amid a deep recession, political stalemate and a widening corruption probe into state-owned oil company Petrobras.

With the continued waning of business and consumer confidence and Brazil’s equity index near a seven-year low amid a global sell-off in the first week of January, it may be difficult for the real to recover in 2016. The currency could, in fact, trade at new lows if commodity and energy prices continue to tumble in 2016.

 

These four currencies will be the centre of attention in the coming year with the Chinese yuan mainly in the focus of currency traders.

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