Talk about starting the new year with a bang! Commodity currencies logged in plenty of strong forex moves early this week, thanks to these major factors that rocked the financial markets:
Middle East geopolitical tension
Over the weekend, global headlines were chock-full of reports on the escalating tension between Iran and Saudi Arabia after the latter executed popular Shiite cleric Nimr al-Nimr and 46 other prisoners. Keep in mind that these two nations have already been at odds with each other when it comes to the regional sectarian conflict between Sunnis and Shiites, and it doesn’t help that other nations in the region are starting to take sides.
Following this fallout, Saudi Arabia cut its diplomatic relations with Iran and even suspended all flights to and from the country. Russia and China have already issued statements urging for a peaceful resolution to the conflict, fearing that further provocation could wreak economic havoc. Apart from the potential impact of this geopolitical tension on market risk sentiment, the Iran-Saudi Arabia conflict also has repercussions on OPEC dynamics.
Recall that the oil cartel has stubbornly refused to cut production even as prices have plummeted last year, with the larger players such as Saudi Arabia looking to edge out the competition from U.S. oil producers. On the opposite end of the spectrum, Iran has been calling for production cuts to ease the supply glut and provide a bit of support for oil prices. But with Saudi Arabia and its allies UAE and Kuwait calling the shots, the recent conflict might lower the odds of an actual reduction in oil production in the near future.
Chinese stock market blues
The Chinese stock market rout has been one of the biggest forex market themes in 2015 and it looks like it might make a comeback this year. Earlier this week, China released its Caixin manufacturing PMI for December and indicated a sharper industry contraction, as the reading fell from 48.6 to 48.2 instead of climbing to the projected 48.9 figure. Prior to this, the Chinese government already released its official manufacturing PMI which actually ticked up from 49.6 to 49.7, but it looks like forex junkies weren’t buying it.
On Monday, Chinese equity indices were down by almost 7% and dragged most global stock markets along with it. After all, China is the world’s second largest economy so any downturn in its performance could have significant spillover effects on the rest of the globe.
Another factor that’s weighing on Chinese shares is the looming expiration of the six-month ban on short-selling among major stockholders. Recall that this suspension was put in place last year in order to prevent further bleeding in Chinese equities, which means that the end of this stopgap measure could spur yet another leg lower for share prices. Smaller players are already pricing in these expectations ahead of the actual expiry on January 8 and market analysts are also speculating that the PBOC might announce further stimulus in an attempt to shore up investment activity.
What’s next for the comdolls?
Overall not a pretty forex picture for the commodity currencies, huh? For one, both factors are likely to keep risk-off moves in play for the time being, with safe-havens likely to benefit from all the uncertainty. In addition, the reluctance to cut oil production could trigger more forex losses for the positively-correlated Loonie while another economic slump in China could be bearish for the Aussie and the Kiwi.
With these market themes present last year, will we see a repeat performance for the comdolls this time? Make sure you review my 2015 forex roundup for the comdolls right here: