With China’s slowing economic growth, coupled with Brexit, the financial market is entering an era full of uncertainty. One of the major asset class affected by the recent economic turmoil is definitely the foreign exchange market. This is evident as the pound sterling has recently dropped to its 31-year low due to the Brexit event. In such challenging market conditions, where can currency traders and investors park their money?
While Brexit has certainly decreased the likelihood of any interest rate hike by the Fed in the near future, the US economies has recently been boosted by healthy fundamental datas, comparative to the other G8 currencies. With an unemployment rate below 5% and strong labour participation data, the US economy is gradually recovering from the global financial crisis. This is further supported by the strong non-farm payroll growth of 287,000 jobs reported in the month of June. Impressive employment gains has certainly aided in rising consumer confidence in US which has ultimately translated to growth albeit slow growth in the housing and retail market. With core inflation rate relatively stable at 2.1% and should such growth remain sustainable and global financial risk dissipate in the future, we will be looking to a possibility of Fed interest rate hike in the long-term future, which will definitely drive the US currency up.
The Real has been one of the best performing currencies this year and appreciation of the currency may continue in the long term as the country’s political scene looks to stabilize in the near future. This is evident from the country’s appointment of a new central bank chief as well as the enshrinement of autonomy to the central bank to use the necessary tools to help improve the economy. Under the administration of interim president Michel Temer, initiatives have been made to save the country from its deep recession. For example, the country is trying to curb the amount of excessive government expenditure through the implementation of new spending rules and regulations. With the background of such developments, investors’ confidence is set to rise as they are banking on an economic boom once political stability improves in the near future. In view of Brexit coupled with the expectation of declining economies in several developed countries such Australia and Britain, the level of investment liquidity towards emerging markets may also be set to increase which will ultimately benefit countries like Brazil. Possible evidence can be drawn from the recent Brexit whereby the Brazilian Real has appreciated more than other safe-haven currencies like the yen and the swiss franc.
As uncertainty is set to continue to cloud the global financial markets, a surprising winner can be found in the bitcoin market as sharp appreciation was seen throughout the whole Brexit saga. The cryptocurrency is solidifying its status as a possible safe haven currency given that it is unconnected to any government or central bank. This is especially so in the current time where trust and confidence in such institutions is seen to be falling worldwide. With events such as Trump’s presidential election as well as the bloating China debt crisis with its debt-to-GDP ratio soaring from 150% to nearly 260% over a decade, increasing number of investors may be expected to flock into the bitcoin market. Such increase in volume and demand will certainly boost the valuation of bitcoin, thereby presenting a potentially lucrative investment opportunity.
However, with that being said, it is important to note that appreciation of the above-mentioned currencies will still ultimately depend on how global events will play out in the future.
Coherent with investing in other financial products, investment in currencies do have a certain level of risk and returns are not always guaranteed. It is therefore to the investors’ own discretion to continuously keep up with important global news and ensure that your investment is sound and ultimately profitable by also considering other alternative investment options available.