January 2014 will be remembered as the ‘mensis horribilis’ for emerging market currencies. No sooner had Jim O’Neill started pushing the concept of MINTs (Mexico, Indonesia, Nigeria, Turkey) than a range of currencies suffered large falls. When frontier markets come under pressure the Middle East often benefits and through this tough period for EMs we saw large increases in flow into the region.
At the start of this year, the consensus of economists forecast was for a significantly lower EURUSD. Our forecast was less negative and predicted EURUSD would consolidate and stay in a defined range, which has been proved correct. Across the region investors in the US dollar have focused on the progress of US Federal Reserve’s tapering. The underlying view has been that the string of weaker economic data from the US cannot be explained away by the bad weather, so trading has been cautious waiting for greater clarity.
In Europe the slow progress of Eurozone economies and concern over falling inflation levels has also kept investors on the side lines. As a result, interest in EURUSD has been lower than usual and this is reflected in the fact that after two months activity prices are little changed on the year. From 2nd January until Friday 28th February the net change in the currency has been less than 0.5 per cent.
In complete contrast to the EURUSD we have seen strong trading of gold and GBPUSD. The last three quarters of 2013 were characterised by selling interest in gold stalling at prices below US$1200.00. We forecast this would be repeated in Q1 this year with the potential for an improvement and clients have taken the advice on board. Traders have certainly been very active with longer term investors buying from the start of the year, and shorter term traders buying any pullbacks. We have seen this pattern of trading repeated consistently for the past six weeks.
Pullbacks in the gold price have been limited to just one or two days before we have received strong buying interest. As well as value investors buying gold at these levels, the turmoil in emerging market currencies has prompted further moves into the metal. Internationally liquidation of EFT holdings of gold have eased significantly and from the start of the year there has been actually been an increase.
In FX it has been GBPUSD that has seen the greatest focus from across the region. There was already a strong positive sentiment at the end of the year and traders have been keen to stay long the market into Q1. The UK is an economy that many investors in the Gulf are familiar with. Improved expectations for GDP, strengthening employment, and a robust construction industry are keeping traders focused on GBPUSD.
The huge investment in extensive infrastructure projects in the Middle East has continued strong global trade flows between the region and the rest of the world, particularly China. The strength of interest in the yuan from the region has continued in Q1. As the percentage of Chinese trade denominated in yuan increases, the UAE has great potential to lead the Middle East and North Africa as a regional hub for the offshore renminbi trade.