Global markets under heavy pressure

Global markets are facing severe pressures and extending losses with sentiment being weighed down by a wide variety of different factors with this including China uncertainty, resumed concerns over the pace of the global economy, depressed commodity prices and increased tensions over whether these factors are going to encourage the Federal Reserve to delay raising US interest rates this year.

Now that the price of WTI has fallen below its critical support at $42 with this inspiring an inevitable move below $40 we are looking at the commodity market selling continuing and for this to further weigh on market sentiment. The potential for Greece risks to steal headlines once again have also returned following the announcement of a snap-election in September and when you combine all of the above risks together, the markets are exposed to further vulnerabilities and it is difficult to expect a rebound anytime soon.

Gold

Gold is continuing to power through and build on its impressive rally following the shocks from China and the uncertainty that this could encourage the Federal Reserve to distance itself away from its repeated commitment to begin raising US interest rates in 2015.  Gold has jumped by around $70 in under two weeks and found its feet back above the critical $1100 psychological area. This has been a significant rebound for Gold, which would have raised investor sentiment and interest from buyers while also erasing concerns that the metal had lost its safe-haven appeal after failing to budge when the Greece risks intensified just a month ago.

GBPUSD

The Pound sentiment is looking stable following the recent above expectations core inflation reading that allowed the GBPUSD to finally extend above 1.56. The move to 1.57 late last week was a strong technical move and suggests that the GBPUSD can begin building on this and set a new trading range to what was limited to the high 1.56’s since the middle of July. As long as investors do not begin taking profit on recent gains, the GBPUSD could begin to target a new range between 1.57 and its yearly highs just below 1.60.

While the UK economy is slightly more sheltered than others when it comes to China risks, the Pound would be vulnerable to withdrawing gains if the FTSE 100 continues to decline at the same pace seen last week. While the UK currency is relatively stable and less exposed to risks than others, it is going to require further USD profit-taking for the GBPUSD bulls to build up the courage to target the 2015 highs.

Emerging Markets

The emerging market currencies are falling at a pace that is somewhat similar to major global indices, with no floor in selling being currently seen due to sentiment being continuously pressured by multiple different directions. The outlook for these currencies remains for further falls with economic pressures furthering due to the price of oil falling to fresh milestone lows and China risks set to continue until at least the remainder of the current quarter.

The question of central bank intervention is going to remain a popular topic, but the truth is that the majority of these pressures that are declining these currencies are external and there is very little central banks can do to end the punishment for a meaningful period of time.

I am actually looking at the possibility that policymakers might start following the recent lead set by the PBoC/China and the Yuan by weakening their currencies to defend export competitiveness. These markets need to adapt to the fact that commodity prices are set to remain depressed for a long time, and also that trade with China is more than likely to continue declining. Weakening currencies would limit potential exposure to a further decline in exports at a time when these markets are already hurting due to weak commodity prices and the improving US economic outlook.

Despite the USDMYR already exploding from 3.80 to 4.17 in under a month, it is inevitable that the currency is going to weaken to 4.20 against the USD. This is inevitable now that the price of WTI has extended below $40 and I think it could happen early this week. There really is no floor to Ringgit weakness, and if the price of WTI continues to spiral to the low $30’s, the USDMYR will target at least 4.30. The Malaysian currency couldn’t even benefit from the USD weakness over the past few days, which shows a great deal about how weak the investor sentiment towards the Ringgit is at the moment.

The Indonesian Rupiah is another emerging market currency suffering from a bleak outlook, and I envisage the Rupiah hitting further lows against the USD over the remainder of the current quarter. The Indonesian economy will be hurt by both the free-falling commodity prices and weakening trade from China, and this is at a time when the economy is already suffering from GDP targets being missed. The Rupiah could be the next emerging market currency to catch the eye with sudden weakness, and we might begin learning about further government initiatives, such as raising import taxes and restricting corporations using anything other than the domestic currency to prevent the Rupiah from sliding any further.

Follow Jameel on Twitter @Jameel_FXTM       

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