October 2015 Newsletter

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    In This Issue:

  • Fx Market Insights
  • Foreign Exchange Tips for Business
  • Weak Job Numbers Raise Doubts On U.S. Interest Rate Hike
  • IMF Warns of New Financial Crisis If Interest Rates Rise

Foreign Exchange Tips For Business

Foreign Exchange Market Insights
IMF Warns of New Financial Crisis If Interest Rates Rise

Rising global interest rates could prompt a new credit crunch in emerging markets as businesses that have ridden the wave of cheap money to load up on debt are pushed toward crisis. The debts of non-financial firms in emerging market economies has quadrupled to $18 trillion from 2004 to 2014”, the International Monetary Fund has said.

The overall expectation of a potential rate hike in the US will cause an accompanying rise in the USD against world currencies, which in turn will increase the debt burden in emerging markets that are reliant on external funding. The biggest concern for emerging market countries once the US Federal Reserve begins a rate hike cycle will likely be capital outflows as foreign investors repatriate their funds away from emerging market assets back to US assets on the back of a better growth outlook and higher yields. With emerging market debt being largely denominated in USD and tied to US interest rates, there will be a perfect storm to place sizeable stress on world financial markets. Shocks to the corporate sector could quickly spill over to the financial sector.

This warning was published by the IMF on the eve of the annual meeting of the world’s finance ministers and central bankers. Their analysis highlights the global repercussions that the Federal Reserve faces when it decides to tighten policy and when to start unwinding the cheap money policy that has been in place for the past decade. The Bank of England’s chief economist warned recently that the world could be facing the final cycle in a financial crisis “Trilogy”, that began in the US mortgage markets, resurfaced again in the Eurozone, and is now shifting to the emerging markets.

In a globally connected world where economies no longer exist in isolation, foreign exchange rates often experience the greatest fluctuations during times of economic turmoil. In business, understanding how your bottom line may be effected by global events can put you back in the driver seat. Understanding your currency exposure is the first step to setting up a strategic foreign exchange risk management strategy.

Foreign Exchange Market Insights

Market Insights - September 2015 Recap

Weak Job Numbers Raise Doubts On U.S. Interest Rate Hike

Foreign exchange markets were on edge September 17th when it appeared the Federal Reserve may raise the overnight interest rate for the first time in more than nine years. This decision was pushed even further along, however, leaving market participants to question when the path to normalization would finally come to fruition.  On the day it seemed that concerns were high with the Fed regarding the obvious slowdown in China as well as continued emerging and world market turmoil.

Job numbers disappointed on the October 2nd release and pointed to a potential slowdown in the US economy. Many reports as of late have signaled a slowing in hiring by U.S. employers over the past two months leaving many to question when, if even this year, a rate hike by the Fed would be appropriate

Non-Farm employment numbers were an abysmal miss in September coming out far below the 200,000 job forecast at 142,000.  To further concerns, this figure was then revised down shortly thereafter to a disappointing 136,000 jobs.  As a result of these poor numbers, Wall Street saw a significant selloff in U.S. stocks and securities as the dollar weakened and government bond yields tumbled.  Employment is now on track to fall short of figures published last year which would mark the first time this has occurred since the economic collapse in 2008.

The Fed is now left to ponder the future path of American economic policy normalization.  Many have now raised doubts on the rigidity that the U.S. economy can show in the face of a global economic slowdown.  Markets are now pricing in just a 30% chance of a Fed rate hike before the end of 2015, which is a far cry from expectations just a short time ago.