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FX Monthly Report

January 2016


















Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

Technical Analysis
January was characterized by high instability, despite the fact that the EUR/USD only fell 0.27% during this period.
The MACD started the month below the signal line, reaching the lowest monthly value on 6th January (-0.005474). On the same day, the downtrend was
reversed by a bullish moving average crossover, when the MACD moved above the signal line.
On the 8th of January, the MACD reached above the zero line, signal of a bullish centerline crossover. It kept like this, above the centerline, until the 19th
of January, when this trend was reversed with MACD moving below the signal line (bearish signal). On 28 th January we can see that MACD moved above
the zero line reaching the highest value of the month (0.002853).
January was a month of some instability, where the price kept on swinging up and down, oscillating between 1.0751 and 1.0936 (main range).
We can identify 3 support levels during the month: one at 1.0845, other at 1.0810 and finally at 1.0770. In the other hand we can see 3 resistance levels:
1.0925, 1.0960 and at 1.1000. These levels formed what is called Triple Tops. The formation of triple tops is rarer but it’s confirmed when the price decline
from the third top falls below the bottom of the lowest valley between the three peaks on the 21st January.

Fundamental Analysis


In January, the EUR/USD fell from 1.0861 to 1.0831. Despite the small
variation from these values, it was a very volatile month due to several events.

At the beginning of the month the US had several results better than
expected such as the ADP Non-Farm Employment Change, the trade balance
and the CB Consumer Confidence. These results led the EUR/USD to the
lowest value of the month, reaching 1.0751. But shortly after the Eurozone

results came out and pushed the pair to the second highest value of the
month 1.0925. Meanwhile the FOMC suggested that labor market conditions
improved as economic growth slowed in the last year, and inflation stayed
below the 2% level, with this data they decided to maintain the target range
for the federal funds rate at 0.25% to 0.50%. The monetary policy will remain
accommodative, supporting further improvement in labor market conditions
and pushing inflation to 2%. The ECB will keep the rates low and launch a 1.5

February 1st – Mario Draghi Speaks; FOMC
Member Fischer Speaks
February 3rd – ISM Nom-Manufacturing PMI
(US); Crude Oil Inventories (US)
February 5th – Unemployment Rate (US);
Trade Balance (US); Non-Farm Employment
Change (US)
February 11th – Eurogroup Meetings; Janet
Yellen Testifies
February 16th – German ZEW Economic
February 23rd – German Ifo Business Climate;
CB Consumer Confidence

trillion euros asset purchase programme to improve the economy.

Financial Markets Department | fm@fepfinanceclub.org | http://www.fepfinanceclub.org/

Is the Current Low Oil Price an Obstacle to Economic Growth?
In the past, low oil prices have been compared to a tax reduction in its positive effect on the economy. The current low oil prices, which have not been
seen since in the beginning of the 2000s changed the perception of many market participants. The traditional view, that low oil prices support economic
growth are challenged and instead, concern is spread on negative impacts on the world economic growth. As Han de Jong, chief economist at ABN Amro
Bank NV, says “I never thought I would wish, let alone pray, for higher oil prices, but I am. The world badly needs higher oil prices.”
According to Bloomberg, the problem is that the world’s economy today relies far more on
emerging countries than it did in the last periods of ultra-low oil prices. And given that these
economies, with exception to China and India, are oil and commodities exporters this poses some
threats to the economic growth around the world. Gian Maria Milesi-Ferretti, IMF’s deputy director
of research, explains that “many oil exporters face very difficult circumstances so now they have to
cut spending significantly, and this will have an impact on economic growth”.(Source: Bloomberg)
The oil sector has undergone structural changes that led the black gold to hit a 13-year low in
January. In the last years, the supply has increased at a very significant pace. In fact, the industry
seemed to be blessed by a uniquely favorable alignment of circumstances: the technological
breakthrough that allowed the shale revolution came at a time when money was cheap and oil was
expensive (between 2011 and 2013). Thus, the US emerged to compete with Saudi Arabia and
Russia as the world’s biggest oil producer (Source: Bloomberg View). Also, the Middle East
exporters are contributing to the oversupply: OPEC members entered in a price war against shale producers, to defend their market share and Iran is
ramping up production after the lifting of economic sanctions (Source: FT).
On the demand side, the major pressure comes from the global economic slowdown with special relevance to the Chinese economy that has been the
main driver of growth in global demand for crude oil, from 2000 on (Source: WSJ). And as Erica Downs, a senior analyst for the Eurasia Group, says “if
demand won’t come from China, who will step in to fill China’s shoes?”. Yet, there are the ones who believe China’s demand will pick up again. The
recent decrease in oil demand is also, but not only, related to the structural change from an economy based on heavy industry to a service-oriented one.
Thus, a subsequent increase in wealth could allow for increasing oil demand over the long run.
In theory, a long period of low oil prices should benefit the global economy since extra spending by
oil importers is expected to exceed cuts in spending by exporters, boosting then global aggregate
demand. The economies that have been growing stronger are, indeed, oil importers: India, Pakistan
and countries in east Africa. Yet there are doubts that this holds true everywhere (Source: The
Economist).According to JP Morgan’s estimates in the beginning of 2015, the cheap oil would boost
the American GDP by around 0.7% (“a boost to consumers’ purchasing power equivalent to 1% of
GDP, offset by a smaller drag from weaker oil-industry investment”). However, one year later, it
reckons that the “outcome was between a contraction of 0.3% and a boost of a measly 0.1%”. This
is due to the fact that consumers may have saved more than expected and the share of oil-related
capital spending in total business investment in America has fallen by half (Source: The Economist).
Yet we have to consider the indirect effects of the downturn in the oil industry. “The U.S. non-investment-grade bond market is in tatters, with energy
companies making up 15% of its aggregate face value. Energy defaults are increasing, and spreads have widened to distress levels (…) and even outside
the energy sector, junk-bond spreads have widened by 240 basis points over the past year and a half”. According to bank regulators, from the $276
billion syndicated leveraged loans provided by US banks to the oil and gas industry,” 15% are now regarded as distressed, up from less than 4% a year
ago. Such distress drives a tightening of lending conditions system-wide. And that drives recession” (Source: WSJ).
Moreover, oil-producing nations’ public finances are collapsing. Unsurprisingly, the most affected
economies are the ones highly dependent on oil production such as the Gulf Countries, Brazil,
Russia and Nigeria. “Russia has said it will cut public spending by a further 10%” (Source: The
Economist). Saudi Arabia has one of the lowest break-even price for oil (producing profitable at
current low prices), but, even after large-scale fiscal stimulus to minimize the impact of oil prices
on GDP, it ended up with a budget deficit that reached 15% of GDP last year nevertheless (Source:
The current low oil prices seem not to be as beneficial to the world economy as they were in
the past decades. Indeed, the world is not being able to leave sluggish growth behind even with
the oil reaching the lowest values since 2008. On the one hand we expect cheap oil to boost consumption all over the world, but on the other hand it
has a negative impact on exporting nations and also on the oil industry, spilling over to the financial markets as a whole. And since this is a whole new
scenario, there is no playbook for how this one might evolve. It all depends on how global consumption responds.

Financial Markets Department | fm@fepfinanceclub.org | http://www.fepfinanceclub.org/

Contacts – FEP Finance Club FX Team
Charlotte Hoefner
Director of Financial Markets, Head of FX

Pedro Guimarães
Analyst & Trader

Álvaro Leal

Rui Ramos

Analyst & Trader

Analyst & Trader
Financial Markets | fm@fepfinanceclub.org | http://www.fepfinanceclub.org/

Hugo Sanches
Analyst & Editor

Joana Silva
Analyst & Trader

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