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CURRENCIES & INTEREST RATES - OUTLOOK & FORECASTS FOR 2016

This month’s Elliott Wave Navigator publishes Part III of our annual update of price-forecasts for 2016 and beyond. This will also be available in video format sometime during the next few weeks – Parts I & II produced last January took a look at annual price-forecasts for Global Stock Indices (fig’s #1-36) and Commodities (fig’s 37-81) – in this edition, Part III (fig’s #82-123) updates many of the trends for Currencies & Interest Rates.   

Contracts covered in this report: USD, EUR, STLG, YEN, ZAR, AUD, CAD, BRL, Yields

• CURRENCIES: The US$ dollar remains the focal point for all currency analysis. There are two time-series developed for this report, medium-term that depicts the course, direction an amplitude of the dollar’s path for the next several years, and short-term, the outlook for the next several months. Medium-term, the US$ dollar is approaching a major peak basis its repeating 15.59 year cycle. Once confirmed, the dollar is set to begin a downtrend, lasting 7.8 years (half the cycle). This is true for major currency-pairs against the Euro and the Yen. Commodity-related currencies are also expected to form major lows in Q1/Q2 ’16, and then begin a multi-year advance against the dollar. But the outlook is less certain for many Asian currencies as these could underperform. Shorter-term, last year’s US$ dollar index advance from the August ‘15 low must unfold into an Elliott Wave impulse (5-wave) pattern to new highs before this transition occurs. So far, only three waves are visible indicating more US$ dollar strength for the next few months. But once the pattern and amplitude targets have satisfactorily completed, a sea-change of some significance is expected to occur, resulting in the beginning of a multi-year dollar decline that creates ripples right through the financial sector.

• INTEREST RATES: The 60+/- year cycle in interest rates with alternating 30-year periods of peaks and troughs was last forming a cycle-peak in the early 1980’s when rates were at historical highs. Thirty or more years on, rates are now at historical lows. Central banks continue to artificially manipulate interest rates in an effort to stimulate economic growth following the financial-crisis of 208-08 but with varied results. This has led to a lengthening of the 30-year peak-to-trough intra-cycle low originally due in year-2011/12 and releasing a new 30-year uptrend. U.S. long-dated interest rates, thought to be outside of the manipulation range of central banks has also come under radar in the form of quantitative easing bond-buying. At some stage in the not-too-distant future, we expect interest rates in both the U.S. and Europe to suddenly zoom to the upside, as the downward pressure by central banks is suddenly released. But what exact mechanism triggers such an event remains unknown at this stage. Could there be underlying inflation that is currently being disguised though official figures, or will some other exogenous event trigger a commodity rush of buying, like global infrastructure spending? The risks to further deflationary pressures are now limited given the sizable price declines in commodities over the last several years. The risk now flips to the upside. U.S. treasury yields formed major lows in 2012 and 2015 although subsequent rises have not unfolded into Elliott Wave patterns that confirm upward continuity for 2016 and beyond. Despite this however, there are signs that rates formed important lows in early February ’16 and are now in the early stages of trending higher. Long-dated yields in the Eurozone are clinging to levels just above zero – but its trend remains uncertain although our bias remains looking for upside momentum for this year.