What to Expect from Global FX Markets in 2016
Euro might test 12-year lows in 2016
The euro fell to a 12-year low against the US dollar this year. Investors started trading on the monetary policy divergence between the ECB (European Central Bank) and the Fed. The euro is expected to test 1.05 again as the Fed increases its policy rates more while the ECB plans to increase stimulus measures to pull up inflation levels. If the 12-year low gets broken, then chances of the euro reaching parity with the US dollar will increase considerably. The euro has been consolidating in recent sessions at the current levels of 1.08–1.12. A spike outside the band and a closing above the 1.12 handle is required to stage a reversal in the currency pair.
Weak euro could drive economic growth
The euro broke the 1.20 handle versus the US dollar towards the beginning of 2015 as speculations increased for a QE (quantitative easing) program by the ECB and the removal of the peg between the euro and the Swiss franc by the SNB (Swiss National Bank). The pessimism surrounding the Grexit also weighed on the sentiment. The financial health of most members in the Eurozone still doesn’t gather optimism. However, a weak euro is expected to drive growth in the economy. Significant improvements in economic data could reduce the chances of parity being achieved between the euro and the US dollar. Also, the export sector is expected to grow as revenue increased from a depreciated domestic currency. On the other hand, low crude prices globally could negatively impact inflation across the Eurozone. This is a cause of concern for the ECB.
Impact on the market
Looking at the performance of the ETFs across the Eurozone, the WisdomTree Europe Hedged Equity ETF (HEDJ) was trading lower by 3.1% at the end of the year from January 2, 2015, to December 28, 2015. The ProShares UltraShort Euro ETF (EUO) is inversely linked to the euro. It rose by 14.1%.
Spanish bank Credit Suisse Group AG (CS) and Finnish company Nokia Oyj (NOK) ended the year lower by 11.6%. Belgian beverage maker Anheuser-Busch Inbev SA (BUD) ended higher by 12.6%.
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