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Today was meant to be a quiet start to the year. It has been anything but.
The first day of trading showed a strong risk-off move, with US equity markets beginning the year with one of their weakest starts ever and currency traders buying up yen.
The bad start to the year began following Saudi Arabia’s execution of Saudi cleric Nimr al-Nimr, a critic of the kingdom’s treatment of its Shiite minority. This escalated tensions between Iran and Saudi Arabia and added to mounting geopolitical risk in the Middle East. As strong words flowed back and forth between the two countries (and others, which butted in) oil prices went on a rollercoaster ride, with Brent crude rising to as high as $39 per barrel, having traded as low as $36.10 at the end of last year before the execution.
On the economic front, the release of China’s latest PMI, showed a modest miss relative to expectations, coming in at 48.2 versus 48.9 expected. Signs of further economic contraction in China, along with the imminent ban on share trading by major shareholders about to be lifted, sparked a significant fall in Chinese equities. After falling by 5%, the first circuit breaker was triggered, and trading eventually halted after the CSI-300 had fallen by 7% for the day.
Weak PMI data in the UK and US didn’t inspire much confidence in the economic outlook for developed countries either. It’s fair to say that many punters don’t have much conviction in the global economic outlook for 2016 and these series of events were enough to trigger a big risk-off move in markets in a generally illiquid trading environment,
In these conditions, the yen flourished. USD-JPY traded as low as 118.70, after being around 120.30 before the Chinese PMI data were released. There has been a recovery of sorts for the US dollar, with the cross currently sitting at 119.50. The US dollar has in fact been well supported against the other crosses, eking out small gains against the Swiss franc, Euro and Sterling.
It was a different story for EM and commodity currencies.
In the last 24 hours the NZD has been the hardest hit.
NZD/USD is down 2%, trading as low as 0.6720 just before sunrise, and currently sitting at 0.6740. The NZD was well overdue for a downward correction, following its strong spurt in December. In December, NZD/USD was up 3.8%, being the strongest performing major currency, despite lower risk appetite, falling commodity prices, and a narrowing NZ-US short rate spread.
The AUD has also been out of favour and has fallen more or less in line with the NZD. NZD/AUD fell to around 0.9340 yesterday afternoon, but has since risen to around 0.94.
If the first real day of trading is anything to go by, then 2016 is looking like an interesting year.
Buckle your seltbelts.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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