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Gold, Oil & Currencies “Outlook 2016”

In 2015, overall global growth pattern was within reasonable limits. But after 3-downward revisions it leaves no space for argument that the pace of growth was slow and rough.

With Europe striving to attain acceptable level of growth, China making strenuous effort to assure stability and emerging markets that performed steadily until 2008 crisis has started showing signs of nervousness.

Though by world standard, China’s 6 pct growth should be considered good enough. But for China to grow at slower pace rings alarm bell for its domestic market and its major trading partners.

It is because at home to engage its large size population, (1.377 Billion) China cannot afford high unemployment rate, while due to its sizable economic activity. China through its trading activity has also attracted the world in Vendor Financing by providing them liquidity. It specially helps USA that has a USD 18.8 Trillion debt to manage its large Fiscal and Trade Deficits.

Russia, Brazil and Turkey are in absolute distress. Japan too despite strong dose of Abenomics injection failed to respond. Now, with its economy on recovery path, all hopes rest on USA, in a hope that US economy is likely to expand further.

While, FED’s December 2015, rate hike is not a onetime move, watch next two or three more FED meeting that takes place in every 6-weeks time. If another hike takes place during this period, then two more hikes is surely coming. In short, I am expecting 2 or 3 more rate hikes until end of 2106.

General perception is that when FED hikes its rates, there is a potential risk of having negative impact on the remaining world economies because of possible shift of asset.

Emerging market is already under severe stress because of liquidity constrain. Estimated Capital outflow after 2008-09 crash until now is nearly USD 550 billion and they heavily depend on foreign investments/borrowings.

It seems, FED is least worried about the impact of its rate hike on other economies. This is why recent Chinese economic jitters did not matter FED when it took decision to increase its rate.

In last 6-years, US Economy has improved significantly and is still on upside of the curve. Soon after rate hike, FED Chairwomen in her press appearance said that the area of concern for US Central Bank is part-time unemployment. Hence, if this gets better then there is no stopping to US Interest Rate Hike.

Part time unemployment data suggest it is on constant decline, in 2012 the number was 8.1 million, by November 2014 it fell down to 6.85 million and in October 2015 it was 5.76 million. So this is another good future indicator to watch for next direction along with the wage data, which is considered low by US standard.

It is yet to be seen that if FED’s recent interest rate move has influenced other economies or not, but further such moves will surely add pressure on emerging markets economies and underdeveloped economies will come under increased stress. Higher US interest rate is also likely to exert pressure on their currencies and risks capital outflow at a faster pace that will have negative impact on their growth.

El Nino weather pattern is one major factor that can upset all growth/economic calculations. Draught could hit agriculture sector badly, which can potentially lead to food supply shortages resulting sharp rise in inflation.

Any such development could spoil the current relief period enjoyed by the non oil producing under developed countries and some of the emerging markets economies that had suffered badly over a decade due to higher oil prices.

OIL @ WTI $ 37.50 –Brent $ 37.70 = It is obvious when Global growth is lower than the projected target the demand for oil will fall. This year too, there is little hope of optimism for market to rebound, as China could be the Global Economic Hit Man.

USA though producing enough energy (Oil and Gas) is a leading oil consumer and to meet its domestic demand it still import oil. With the prospect of crude oil exports following a 40-year export ban, I consider it a bigger threat for the oil exporters.

Further, Japanese policy maker’s aggression to boost economy did not respond to BOJ’s Quantitative Easing measures and loose monetary policy stance. Since Japan is the 3rd largest oil consumer, this is not good sign for oil produces, as demand will reduce.

Therefore, overall structural global growth problem is likely to persist, suggesting poor outlook for oil. Possible oil deficit if any will be contained because US oil production should easily fill the gap.

Biggest threat for oil market is over supply and saturated storage facility, inventories are at the maximum level due to low demand and excess production. USA poses a big threat as it has already lifted its 40-year old ban on exports and Iran is already knocking at the door to make an entry. Estimates suggest that excess monthly oil production is more than 60 million barrels.

Meanwhile, further slowing down of global growth could bring more misery. Surplus funds of oil producing countries have already started to shrink, whereas size of debt is ballooning.

Therefore, there is a very this chance that OPEC or Non OPEC members agree to cut its production. The glut factor looks extremely dangerous. Hence, in all probability for next two-quarters, oil market should struggle to make recovery or unless there is a visible economic direction with more clarity.

Technical Analysis = Oil would continue to struggle due to glut factor. On any price rise supply factor would spoil the move and should find strong resistance around $ 45. On the down side, break of $ 25-27 would accelerate fall towards $ 18-20 zones. Break of resistance is required for a move towards $ 52-55, which is not a preferred move.

GOLD @ $1062 = Though there are plenty of Gold lovers, but if failed to make upsurge despite well supported by hedge fund managers in their desperate attempt to attract gold buyers. Desperate is because, it is easier to sit on long, but difficult to make money in a Bearish trend or in a declining market and is harsher for the betters and difficult to sell their products.

This year (2016) too gold will struggle to make comeback, as all odds are against the Yellow metal. Some kind of Geo-Political unrest is the only hope that may provide short term up move, which does not look like a possibility. But again no one can predict in advance about possible worsening of condition.

In last previous years, gold had many supportive factors such as European unrest, US Economic woes, Central Bank buying, China growing at double digit. There is lot of talk about India’s high growth rate and its global contribution, but there is no comparison with China, as India has external debt of USD 475 Billion and has Fx reserves of USD 351 Billion, whereas despite China’s external debt shooting up from USD 1.03 Trillion in March to USD 1.68 Trillion in 3-months period, it still has Fx Reserves of USD 3.44 Trillion.

Despite cheapest gold in 4-years, it is worth nothing that China’s gold buying share increases by around 25 percent annually. India’s share is notch below, which means the percentage of their share is roughly around 40 pct.

In recent years, Gold normally gets an upward push around year-end, which is due to festival period in India, but its upward momentum is short lived, as buyers shy away from further aggressive buying.

The frequent occurrence of this trend in recent years is because of liquidity constrain. FED started unwinding of its stimulus program in 1st quarter of 2014 and it halted supplying free money to the speculators. Unlike USA, Chinese and European easing is meant for economy stimulation.

But more importantly the biggest dent for the global economy is Cash Squeeze caused by drop in oil prices dropping by more than 60 pct, which means based on global demand of 95 million barrels per in 2015 Cash Shortfall amounts to USD 2 Trillion.

With combination of Softer Oil Prices, US Interest Rate Hike and strong US Dollar, there is no respite for gold lovers. Hence, I am expecting price slump to continue.

Since I do not believe in supply plunge, as this a gimmick by the producers, like we have been always hearing about cost of shale oil above USD 100 per barrel, which has proved to be untrue. The truth is that declining oil prices have surely reduced cost of Gold production.

Therefore, preferred strategy would be to sell on occasional bounce back. I will be comfortable selling Gold on any rise and suggest picking the top, with profit taking at support levels to resell.

Technical Analysis = This is likely to be another bad year for Gold, which should test new lows. Any up move should be used as opportunity to sell as strong barrier is around $1170-00 levels. A break of $ 950-80 levels will open gates for $ 890.

EURO @ 1.0865 =  Euro zone problem will continue to haunt, as its Quantitative Easing (QE) program, which initially looked supportive is not delivering desired result, the reason is obvious. Funding provided is not utilized for expansion of economy through corporate lending. It seems that the sole purpose of money supply is only meant to buy Toxic Asset from banks.

Furthermore, apart for internal and structural problems, domestic European demand is weak. Hence, prospects of European economic growth are heavily dependent on China’s economic recovery, as its manufacturing sector weighs heavily on external demand. This is one big factor that caused German exports to fall sharply in 3rd quarter of 2015.

The real challenge for the Euro region economy is to hit 1.5 pct growth or beyond by 2016. By comparison it is still struggling to recover and currently it is no more than 60 pct of the total global growth. This is why there is lesser probability of unwinding of European QE in near term.

Therefore, all odds suggest that unless there is a further policy shift in ECB stance or FED supporting weaker US Dollar, Euro is likely to remain under pressure.

Technical Analysis = Combination of factors, US Interest Rate Hike and ECB’s QE Policy stance, which could extend beyond September due to low inflation would determine Euro’s next trend. Euro is most likely to struggle to surpass 1.1280-50 Resistance levels, but on the downside 1.0405 is the 1st support level, break would risk for a test of 1.0220-80 zones. Failing to bounce back from here risks for deeper fall to test 0.9880-50 levels. However, though I do not favor up move, but break of Resistance levels would encourage for a test of 1.1550 levels.

GBP @ 1.4735 = There is no formal understanding on UK and US Interest Rates, but past record suggest that Bank of England (BOE) have been quick to raise its rate after US rate hike.

Prior to US rate hike BOE Governor Mark Carney in on record having said that the next move in rate hike is likely to be upwards. But this time due to extremely low inflation, chances of referendum to decide UK’s fate about parting away with European Union and ongoing slow growth, BOE will refrain from acting soon.

Hence, one thing is for sure that until referendum picture is very clear, as Cable is likely to find seller on any upsurge.

Technical Analysis = Pound will remain under pressure for some time and will find selling interest on any upside move. It is unlikely to make gains beyond Resistance levels around 1.5410-50. A dips below 1.4290 is required for deeper fall towards 1.4040. However, only break of Resistance levels would encourage for a test of 1.5580, which does not look possibility in next 5-months.

JPY @ 120.13 =  Japan continues to struggle against prolonged deflation and is unlikely to achieve its 2 pct inflation target by end of its Fiscal Year, March 31 2015. Despite huge decline in oil prices, Japan that import more than 85 pct of its oil from overseas may not achieve its 1.5 pct growth target.

US Interest Rate Hike and further hike in coming months risks Capital outflow, which should add pressure on Japanese economy.

Technical Analysis = Japanese Yen to maintain its weaker tone as resistance 118.50-80 should hold. However, the currency has strong support around 125.70-20 levels. Break here would encourage for another 200 pip move. Penetration of Resistance could encourage rally for a move towards 115.50, which is not favored move.                                      

                                    Economic Data 2016 Projection

US Interest Rate                        0.75 – 1.00 pct

US Bond 10-years                     2.70 pct

OIL                                            $ 25 or $ 18

GOLD                                        $ 970 or $ 890

EURO                                        1.0410 or 0.9880

GBP                                           1.4290 or 1.4040

YEN                                           126.20 or 128.20

AUD                                           0.6710 or 0.6510

YUAN                                              6.990

INR                                             68.40


Pakistan Economic  “Outlook 2016”

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transactions)

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