Month of July marks the first month in the second half of 2014. This is the right time to review what the economy worldwide is doing, and check on what are the most important fundamentals that forex traders need to know. In this editorial, we are going to sum them up for you.
Speaking in Cercle des Economistes conference in Aix-en-Provence, France, IMF Chief Christine Lagarde said that the economy will speed up in the second half of 2014, though less than previously forecasted by the organization. Quoted by Bloomberg, yesterday Lagarde said that, “The global economy is gathering speed, though the pace may be a bit less than we previously predicted because the growth potential is lower and investment spending remain lackluster.”
The statement concisely summarized global economic growth that somehow remain precarious although US economy have been picking up amidst careful directives from its central bank and China government once again launched massive stimulus programs. The problem now stemmed from the Eurozone that is still fighting falling inflation and meagre employment.
US The Fed Dovish Stance
US employment data last week suprisingly showed robust improvement, despite of the country’s disappointing first quarter GDP growth. US GDP in the first quarter of 2014 noted contraction at -2.9% growth. However, at the last count, Unemployment rate on June down to 6.1% from 6.3% in the previous month. The stats underlined the inconsistencies that might be the reason why the Fed chief keep holding on to low interest rate. While hawkish members of the Fed might wish for earlier rate hike, the chief’s dovish views is expected to dominate the central bank policies.
China’s Operation Recovery
Meanwhile, the world’s second biggest economy undergo significant threat from piled up credit and environment damages. To prevent a systemic credit crunch, the People’s Bank of China (PBOC), have released several measures to tighten lending provision, relaxed banking reserve requirements, and stimulate the stalling economy. The measures include billions Yuan relending for agriculture, small businesses, and low-income housing, and massive investment in railway and several public sectors. The moves has reignited the machines in China economy for the time being.
Eurozone High Risk Area
The highest risk in the world right now is the Eurozone. Put separately, Eurozone countries might not be as influential as it is. However, put them together, and the low growth, high debt, and high unemployment started to make up for a high risk level on the world’s growth. Among the 18 countries, German is the only one that stand strong, while Greece, Spain, and France, turned out to be unexpected burden.
Unlike the first two countries’ central bank that have already put their foot forward, European Central bank remains mysterious in how they will stop falling inflation rate. Interest rate cut last month is mostly useless to stem the falling economy, while stimulus and TLTRO plans are still hidden behind the screen. Additionally, although the plans might managed to push inflation up, the problem of debt and unemployment will need significant support from the fiscal side too.
Japan Struggling Economy
The main worry in Europe is that the area will fall into Japan-like decline. Japan have fallen into deflation and extreme low growth post-2008 crisis. Despite of PM Abe’s efforts to revive the country, significant improvement on vital indicators is yet to be seen. However, Japanese businesses remain optimistic, as shown in positive PMI from time to time. The central bank is now apparently in ‘wait and see’ mode, but the government stays active in looking for alternatives. The loss of China as export destination too, have smoothly handled by moving on to Southeast Asian market. We will further see the fruits of their hard work in the second half of this year.
High-Priced Commodities
First half of 2014 recorded several high-impact geopolitical conflicts, including Ukraine Crisis and ISIS insurgency in Iraq. These circumstances led commodities’ prices to stay high. High prices of commodities, mainly oil and energy, make it much more expensive for struggling countries to recover due to high material costs. If this goes on, the ones who will get dragged down first is emerging countries. On the other hand, gold prices will gain the advantage for the same reason.
Emerging Markets High Rate
Almost all of emerging countries have already hiked rate by now, with the fragile five topped the list of world’s highest rate. This happen while US The Fed is in the process of withdrawing its stimulus, not yet signalling rate hike. The emerging markets hiked rate with the hopes of stalling capital flights out of the countries, but by doing so, they sacrificed economic growth. If the Fed really is going to remain dovish, then that is good news for these countries. Otherwise, we might see some country tumbled head first, leading to major capital flight to the US, UK, Australia, and New Zealand.
UK Housing Bubble
The UK was voted as the second country most likely to hike rate this year after New Zealand. However, the Bank of England governor sounds hesitant to do so in his latest speech. The main consideration now is the housing bubble. Signs of the bubble have been seen by some economist, while some other said that it is not so big yet. Nevertheless, we shall conclude that the Bank of England’s plan to hike rate is postponed indefinitely. The country’s economy is still the most robust among G8, but anyone hoping to take advantage of UK rate hike should wait till next year.
Kiwi And Kangaroo Keeps Up
Two other countries that has defended their economy against worldwide declines are Australia and New Zealand. The two countries struggled to fight currency appreciation, but their economy generally show satisfactory performances. As China economy slowly recovered, we could hope for their growth to pick up too. In the following months, we shall expect further rate hike announcements from Reserve Bank of New Zealand and more jawboning from its counterpart in Australia.
What These Mean For Forex Market?
The long narrative shall be concluded in threee brief points:
Monetary policy disparity among leading central banks remain an important focus in the coming weeks. Note that the Euro has the most dismal prospect in this period, while NZD and AUD might win through carry trade.
Economy recovery talk is still underway. Expect improvement in fundamental economy releases from the US and China, but lower your expectation on the Eurozone.
Take note of geopolitical risks and calculate the probability of other explosive events happening this year. Japanese Yen and Gold prices will stay afloat on these issues.
Well, those are the most recent development of worldwide economy that you need to know if you are a forex trader. Plan your trade accordingly, check on the fundamental calendar frequently, and never forget to manage your money carefully.