JANUARY – SNB Black Swan, ECB QE, Syriza Elected
2015 started with a bang. On January 15th the Swiss National Bank dropped its 1.20 EURCHF floor, sending the Swiss franc soaring. This came just days after SNB chairman, Thomas Jordan, publicly voiced his intention to defend the cap. Turmoil ensued as the pair tumbled from 1.20 down to as low as 0.80, wiping out many long positions that had seen the 1.20 level as an SNB guaranteed stop-loss.
In other news, the ECB announced that it would be commencing its own Quantitative Easing (QE) program, with higher than expected asset purchases of €60 billion per month. The Bank of Canada cut rates in response to the oil price shock, causing the Loonie to drop 1.6% against the US Dollar. Many others were to follow in coming months.
Finally, the first chapter of one of the main stories of 2015 commenced with radical left party, Syriza, winning the general election in Greece.
FEBRUARY – Inflation, or lack thereof
February started with another rate cut, this time from the Royal Bank of Australia, which sent the Aussie to a five and a half year low and kicked-off a third year of declines for the currency.
Greece was in the headlines, with February's meetings between the Greeks and their creditors being dominated by a lot of squabbling over terminology. Neither party seeming to want to give any ground to the other.
Inflation, or lack thereof, was another recurring theme, with less than encouraging data coming out of the US, UK and China. Markets were also waiting with baited breath at any hint that the Fed may be raising interest rates in the immediate future, with Janet Yellen starting to prepare markets for a shift in the Fed’s language.
MARCH – Greece's bailout extended
More interest rate cuts dominated the economic headlines in the early part of the month, as the lack of inflation around the world pointed to a worrying global slowdown. This time cuts were made by the People's Bank of China and the Reserve bank of India, their second rate cuts in as many months.
The beginning of March also saw Greece securing a bailout extension for four months, with creditors pushing for some concrete plans from the Greeks as to how the country would meet its obligations in the coming months.
Finally, weaker than expected inflation data from the UK gave lie to the myth that the UK would be ready to raise interest rates before the US, and a dollar dip from 8-month highs had the markets asking “correction or consolidation?”
APRIL – Consolidation mode
April saw major currencies moving into consolidation mode, with much tighter trading ranges than had been seen earlier on in the year. The beginning of the month also provided us with something of a shock in equities; the Nikkei touched the 20,000 level for the first time in 15 years, but the yen was largely unstirred by the move.
The word Grexit was on everyone's lips again as fears mounted that the heavily indebted nation would default on its next IMF loan repayment, due May 1. Less than encouraging trade numbers from China and the lowest GDP data in 6 years strengthened worries of a Chinese economic slowdown, another story that would run for most of the year.
MAY – Conservative majority
The Royal Bank of Australia cut its key rate to 2% and maintained the view that “further depreciation is both likely and necessary” on the Aussie. In the UK, David Cameron retained his position as Prime Minister and with the first Conservative majority government elected since 1992. Sterling reacted favourably to the news, rising an impressive 1% against the dollar and 1.5% against the euro.
Greece managed to make its first loan repayment to the IMF, but doubt remained as to how it would be able to honour its next repayments in the months ahead.
May also marked the end of USD strength, as the dollar finally gave up the gains it had made in the early part of the year (the dollar index went from being 11% up to just 3.5%).
JUNE – No hike in sight
Mid-2015 was all about the return to volatility in FX markets, a central catalyst of which was increasing volatility in bond yields but also expectations for the Fed tightening rates, full-blown QE in the Eurozone and uncertainty over Greece's future within the single currency.
The FOMC meetings in mid-June scuppered hopes that the Fed would be hiking rates any time soon, causing the dollar to weaken and sending the EUR into the top of its recent range. This was despite Greek banks haemorrhaging cash as deposits took flight. The month also saw Greece's banks close, the imposition of capital controls and the country's 1.5bln IMF deadline pass without payment.
June also marked the beginning of China's infamous stock market crash, causing more than 20% of its value to be wiped out by the end of the month.
JULY – Greeks say OXI
In a year that saw Greece dominating the headlines, July was the month it all finally came to a head. Greece held its public referendum, in which over 61% of the population voted against the proposed measures of the creditors. Finance minister Yiannis Varoufakis resigned and was replaced by Euclid Tsakalotos. Greece's banks remained closed throughout most of the month and in a complete U-turn the Greek government reached a deal with its creditors for an 86 billion euro bailout.
In other news, commodities such as oil, platinum, palladium and particularly gold found themselves under pressure, with a knock-on effect on commodity currencies such as the Canadian and Aussie dollars.
Finally, the end of the month brought us little clarity regarding the possibility of the Fed tightening interest rates, as well as a continuation of US dollar weakness.
AUGUST – Yuan devalued, volatility highs
August, which is usually a more subdued month, proved to be quite volatile with the Yuan being devalued and the continuation of China's market woes. The Chinese stock market lost around 8.5% of its value on Monday, August 24th and another 7% on Tuesday, August 25th. All this against the backdrop of a general Chinese economic slowdown and mounting fears regarding the detrimental knock-on effects for the global economy.
The VIX reached highs that hadn't been seen since 2011 and the S&P 500 closed down 7.5% on the month. Risk averse investors chose to sit on the sidelines, causing liquidity to dry up and further exacerbate price swings. In addition, the Fed signalled that the expected September rate hike would not be coming to pass.
The Russian Rouble weakened close to new highs for the year on USDRUB, weak oil prices and general risk aversion having consistently pressured the currency over the previous two months.
SEPTEMBER – Naughty VW
September's big news revolved around automotive giant Volkswagen (L:0P6N), as news surfaced that the company had installed software on its 2009-2015 diesel vehicles to give reduced emissions readings when being tested.
The long anticipated Fed rate hike failed to materialise, which had the effect of exacerbating investor uncertainty. Equities had a bad month as yet more disappointing data from China cast a shadow over the prospects of global growth. The yen emerged as a safe haven currency of sorts, with the usual suspects, the US dollar and Swiss franc not fulfilling their traditional role. This due to changing expectations regarding the Fed and negative interest rates in Switzerland. EURNOK made news highs for the year after the Norges Bank cut rates to a low of 0.75%.
OCTOBER – Risk appetite returns
Risk appetites returned in October with a Chinese rate cut, expectations that Japan and the Eurozone would further ease their respective monetary policies and an encouraging start to earnings season for US equities. The Fed, once again did not raise interest rates but hinted at a possible December hike.
However lower growth and lower inflation was the underlying theme, with lukewarm GDP data from the US and the UK further demonstrating the chasm between equities markets and the reality on the ground.
NOVEMBER – Encouraging jobs data and the possible hike
November saw a strengthening of the US dollar after encouraging jobs data on the first Friday of the month. Expectations for a December rate hike also grew, many regarding the hike as almost a foregone conclusion. US equities also registered a slight up-tick in anticipation of December's interest rate decision.
Eurozone equities did better than most other regions in expectation of further monetary easing, however, equities as a whole largely underperformed, with the MSCI World dipping negative to -0.5%.
In other news, Brent oil fell to an 11-year low as the falling demand caused reserves to grow, with falling oil prices keeping headline inflation at or near zero in the UK, US and Eurozone.
DECEMBER – Fed Finally Increases Rates
It was a long time coming, and they certainly made the markets wait for it, but December 2015 marked the end of the US era of zero interest rates as Janet Yellen signalled that a “gradual” tightening would ensue (the word gradual repeated 8 times throughout her address). Overall, markets were just relieved it had finally happened.
Equities initially rallied on the news, although the reverse was true in commodity markets, with oil particularly taking a hit throughout the month. Though it should be approaching support levels, with OPEC showing no signs of slowing production, many investors are choosing to sit on the sidelines and wait this one out.
Finally, in what could have been a repeat start of 2016, albeit with a party from the radical left at the helm in Spain, the conservative Partido Popular party took the election win but managed to secure far fewer seats than they did in 2011. This opens the possibility for some form of coalition. The EUR was largely nonplussed by the news, continuing to trade sideways as trading begins to wind down for the holiday season.
HAPPY NEW YEAR
There are reasons for optimism and also caution as we look to the year ahead. Volatility on the dollar will increase for the first half of the year, as nearly all Fed meetings will be seen as ‘live’ for the possibility of a rate increase. Dealing with such interest rate policy uncertainty on the dollar is something the market has not had to consider for seven years. Investors will have to learn new skills to deal with this. It will be a good year for the dollar, but it won’t be an run-away year as the Fed will struggle to deliver the four interest rate increases the FOMC had in their projections.
Elsewhere on the majors, we are likely to see the single currency remain under pressure as the Eurozone struggles to find a sustainable recovery and further easing measures are forthcoming. Sterling has a potential referendum on the UK’s membership of the EU to deal with, which could weigh in the middle half of the year. The Yen may well surprise to the upside, as structural factors that have been bearing down on the currency lift. China won’t be far from the headlines as it continues to struggle with a slowing and re-balancing economy and the currency will play an evermore important role as a policy tool.
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