Tags: invest | economy | fed | rate

Brace for Weaker Euro, Stronger Dollar and More Uncertainty

Brace for Weaker Euro, Stronger Dollar and More Uncertainty

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Friday, 20 November 2015 08:51 AM Current | Bio | Archive

Federal Reserve Vice Chair Stanley Fischer said: “We have done everything we can to avoid surprising the markets and governments when we move, to the extent that several emerging market (and other) central bankers have, for some time, been telling the Fed to just do it.”

When the Fed vice chair says other central banks have said the Fed to get on with its first rate hike, I think we’re allowed to suppose these central banks have made their preparations for the coming new environment that will be created by the Federal Reserve when on December 16 we’ll have a liftoff.

Maybe it could be helpful to investors at this moment in time to have an overview how prices, labelled in U.S. dollars, of various commodities and financial assets have performed on a year-to-date (YTD) basis (prices as noted a few days ago) where the best performer YTD has been the dollar index (DXY) which was up about 10 percent while on the downside we had iron ore that was down close to 35 percent, copper down more than 20 percent, the Canadian dollar and euro both down more than 10 percent while gold was down more than 8 percent and silver down more than 6 percent.

In this context, it could be interesting notice of what Goldman Sachs just said to its clients they expect a gradually improving of global growth at 3.5 percent in 2016, but which is, albeit only fractionally, lower from the latest IMF forecast in its October World Economic Outlook of 3.6 percent in 2016.

Goldman Sachs expects a sequentially higher allocation to commodities by 2017, but warns downside risks to their forecasts are “non-negligible,” especially in the oil market as in the near term they expect storage utilization continuing to rise. Only a couple of days ago they also stated an oil price drop to around $20 per barrel could not be excluded in the near future.

I think, investors that are interested in acquiring “cheap” oil for their portfolio could do well preparing themselves for being ready to act in case Goldman’s expectations should come through. Please keep in mind, in case the bottom of the oil price falls out, it won’t stay there for long!

Anyway, Goldman expects now WTI crude oil at $45 per barrel in 2016, which is down from $57 earlier.

Please take care also not to overlook the fact that “geopolitical” events, which are out there, could suddenly turn everything upside down and make oil prices spike, albeit for a short while.

Examples of geopolitical risks that could impact the price of oil if they were to occur are for example:
  • On December 6, we have elections in Venezuela that could lead to serious unrest in the country and if they should occur could disrupt Venezuelan oil exports.
  • Sudden tensions between Saudi Arabia and Iran, which cannot be excluded in the near to median term.

That said, ECB President Mario Draghi said: “If we conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate … The level of the deposit facility rate (already is at negative -0.20 percent) can also empower the transmission of the asset purchase program (APP) … If we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible.”

To keep it simple and without much risk of making an overstatement, we can say we are “close to 100 percent” certain (nothing is ever 100 percent certain):

  • The ECB will ease further on December 3 when the Governing Council of the ECB has its monetary policy decision meeting, and
  • The Federal Open Market Committee (FOMC) will raise the Fed funds rate on December 16.
Yes, we are at the dawn of a brand-new divergent monetary policy era between the ECB and the Fed, which implies a weaker euro and a stronger dollar going forward and a lot more unknown unknowns.

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HansParisis
Yes, we are at the dawn of a brand-new divergent monetary policy era between the ECB and the Fed, which implies a weaker euro and a stronger dollar going forward and a lot more unknown unknowns.
invest, economy, fed, rate
683
2015-51-20
Friday, 20 November 2015 08:51 AM
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