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against the U.S. dollar to nearly 6.56 yuan per dollar.
Fear seized global financial markets. Speculation that
China was in trouble and could need to devalue further
sent capital outflows from China to record levels and
in turn debilitating the yuan to even further lows of
6.61 yuan’s per dollar before the end of January. Fears
of global economic contagion drove asset prices down
farther. China’s stock market lost almost 25% of its
value, and safe haven currencies such as the dollar and
yen soared to new peaks. So high were fear levels that
the yen kept strengthening even after the Bank of Japan
(BoJ) passed new stimulus measures, adopting for the
first time a negative interest rate.
Currency movements in January and early February
exacerbated prior downward trends in global
commodity prices expressed in U.S. dollar terms. Brent
crude fell to just over $28 dollars per barrel; non-oil
commodity prices also plunged in dollar terms. Global
equity markets entered a bear market.
Things looked so gloomy that even the Federal Reserve
(the Fed), led by Janet Yellen, seemed threatened and
overwhelmed by it. At their 27 January meeting, the
Federal Reserve’s monetary policy committee voted to
keep rates unchanged and seemed to hint that the Fed
would sit tight while assessing how global conditions
could affect U.S. growth.
In early February, many economic specialists started
warning that the US would enter a recession within
the next 12 to 18 months. As such, many started to
criticize the Fed’s decision to hike rates the previous
December 2015 with the US economy showing signs of
losing steam. With several European central banks and
even the BoJ having introduced negative policy rates
to stimulate growth and inflation, several specialists
started voicing that the Fed should follow suit.
In first half of February, just as these voices began to
echo in financial forums, financial markets started to
stabilize. An important stabilizing trigger was a pickup in
oil prices on talks between Russia and the Organization
of Petroleum Exporting Countries on a possible output
freeze. In less than a week, oil prices gained more
than 10%. The U.S. dollar moved down against most
currencies around the World, with the USD/CNY
stabilizing at around 6.57. Risk aversion subsided.
On February 12, positive news came out in the US:
January’s retail sales had advanced more than expected.
A few days later, more positive news came out, this
time from China: the PBOC said it viewed the yuan as
undervalued. Its currency promptly advanced against
those of its trading partners.
Investors who had gone to cash in safe-haven currencies
started returning to risk assets, causing oil prices in dollar
terms to keep advancing. By early March, they had risen
another 10–15%, which fed back into optimism.
It was in this environment that, on March 4, the USA’s
jobs report showed more job creation than expected.
Oil prices recovered to end-2015 levels.
On March 10, the European Central Bank (ECB) lowered
its reference rate to zero and expanded its quantitative
easing program. While these measures were not
unexpected, they, too, contributed to calm that was
returning to the world markets.
All eyes then turned to the Fed. Speculation that the
Fed would not hike rates in March had weakened the
U.S. dollar further against world currencies. The Fed
surprised financial markets on March 16 with FOMC
member median views that just two rate hikes would
be appropriate this year, not the four projected at last
December’s meeting.
At first, the U.S. dollar weakened further—to levels
not seen in nearly nine months. But then came reports
showing improvement in the U.S. manufacturing sector,
and statements from four Fed presidents that analysts
were underestimating US economic strength and
inflationary pressures. These events sent the dollar back
up some.
On Friday 25 March, with the first quarter about to end,
the USA revised up fourth-quarter GDP growth figures
by four tenths of a percentage point. (Data movements
like this one boost the dollar because they point toward
earlier Fed hikes.) But since then, a dovish speech made
on March 29 by Fed Chair Janet Yellen drove the dollar
back down.
Forex market risks for the remainder of the year
So where do the world economy and the U.S. dollar go
from here? Of course, the only sure forecast is to expect
the unexpected. Nonetheless, a few educated guesses
suggest that the USA will escape recession this year and
possibly next year too.
Whatmakesme say so? Something I call global resilience.
While it’s true that economies and asset prices can turn
south abruptly, at the same time and to my ceaseless
amazement, more often than not, the world economy
comes through adversity intact or even ahead.
Now, this isn’t to say that no risks lie ahead. Several
well-known ones do lies ahead; and some less well
knowns lurk too. The obvious ones are ISIS terrorist
attacks, “Brexit”, China’s slowdown, and, most of all,