Four key economic themes are likely to shape corporates’ risk and foreign exchange (FX) strategies over the coming year, according to the Canada-based global payments technology and currency risk management software group Cambridge Global Payments.
Karl Schamotta, the group’s director of FX research and strategy, believes that 2016 is again likely to be one of market volatility. He outlines the following four themes, which are likely to be prevalent:
- Emerging markets surpluses are shrinking: The tide is still going out as surpluses generated through trade are shrinking due to global economic slowdown and the rebalancing of China. These economies are in a position where they will not reinvest trade into western financial markets; leaving them looking for a new source of liquidity. Thus, motioning the European Central Bank (ECB) to become a contributor to global liquidity will be key in 2016. Potential opportunity: uncovering specific areas that may be oversold from a capital flow perspective.
- China will continue to downshift: In 2016, it is expected that China will stop reinvesting into treasuries and will continue to support the renminbi (RMB), meaning they will have to sell assets in the US. As global tightening in monetary conditions continues, there is an increasing risk that this will create a number of exposures for countries and companies. Stabilisation in the number of prepared global economies in 2016 suggests that Canadian exporters might be in a good position to extend their sales to new markets.
- Recycling of petro state surpluses: Historically, countries such as Saudi Arabia and major global oil exports took a large proportion of their incoming flows (sales of oil) and reinvested that amount of money into western financial markets, primarily the US. In 2016 the group expects to see that flow dry up largely because oil prices are so low with implications on markets outside of the oil exporters themselves.
- Why this matters to business and currencies: Trade and corporates in emerging markets that have borrowed in dollars are exposed to tertiary effects as they continue to underperform. Many companies have run to the euro as a funding currency with an expectation that cost will remain low in the foreseeable future.
However, the group notes this as a key risk, given the potential reversal of the euro that could cause a lot of bleeding. On the currency front, the US dollar (USD) may taper off in 2016, suggesting a crowded trade which will create exposures for businesses. Continued two-way volatility is anticipated in the Canadian dollar (CAD), with weakness from global commodity prices and continued underperformance in the Canadian economy.