Will Brazil Turn A Corner In 2017?

Lior Alkalay - INO.com Contributor


In Brazil, the year 2016 will no doubt go down in the history books as one of the worst the country has experienced. The Brazilian president, Dilma Rousseff, was impeached for the role they played in a bribery scandal and for illegally disguising the country’s real debt. Moreover, the Brazilian economy had its worst recession in more than half a century.

And yet, there are some encouraging signs that, at least as far as the economy and the Brazilian Real are concerned, the country might have turned a corner.

Brazilian Bonds Revival

In the months of January and February, when the political climate turned more and more chaotic and Brazilian growth tumbled, yields on Brazilian 10-year bonds were as high as 16.78% and CDS prices, which measure the likelihood of a sovereign debt default, jumped to 7%. One would then expect that, from this point onwards, and especially in recent months with the prospect of a Fed’s tightening weighing on bond markets across the globe, the already fragile Brazilian government bonds would experience an utter meltdown, even to the extent of risking an actual default. But what happened instead was interesting. While bonds across the world were tanking and yields surging (bond yields move in reverse, relative to prices) amid the Fed’s tightening, Brazilian bonds staged an impressive rally, and yields on 10-year bonds fell from their highs back in January to as low as 11.4% today. Unsurprisingly, this was followed by an impressive rebound for the Brazilian Real. Continue reading "Will Brazil Turn A Corner In 2017?"

China 2017: More Boom Before the Bust

Lior Alkalay - INO.com Contributor - Forex


Despite the Yuan’s value recently plummeting to an eight-year low, the Chinese economy has been rather stable in the second half of 2016, manufacturing PMI held above 50 (above 50 signals expansion); exports reached $196.8 Bln in November(from $176.2 Bln in January); and in industrial production growth averaged 6.14% Year over Year.

Together, these changes all represent a strong indicator of growth - and of bounce-back - and all thanks to the Yuan. Or more accurately, to the Yuan meltdown. Even as the Chinese Yuan shed more than 7.1% this year, it allowed China’s exports to rebound and stabilize industrial and manufacturing production. But all that stability comes at a stiff price, down the line.

While a weaker Yuan helps exporting sectors, it causes problems in China’s domestic economy. In it, an exceptionally weak currency has the same impact as monetary easing, creating an inverse relationship where, when the Yuan’s value is eroded, China’s housing bubble swells.

The more China’s housing bubble swells, the more its debt problem becomes acute. And, ultimately, the more painful its bust will be. Continue reading "China 2017: More Boom Before the Bust"

How The OPEC Deal Impacts The FX Arena

Lior Alkalay - INO.com Contributor - Forex


The much-anticipated OPEC deal to cut oil production has finally been reached. Brent and WTI Oil futures were not too late to react and jumped more than 7% with Brent Oil futures surpassing the $50 mark. And if momentum continues we could very well be looking at $60, perhaps rather soon. If that is the case, this can change the picture, not only for Oil futures and Oil companies but for currencies of Oil exporting countries, many of which were hit hard when Oil prices took a nose dive and could benefit now that oil prices are taking off.

The question is how exactly would an Oil rally play in petro-currencies in the current macro environment? Is it a good opportunity to buy into the battered Ruble? Or maybe a Norwegian Krona rally against the Euro? The options are numerous, but once we delve into the economic dynamics of each currency, the options narrow fast. Continue reading "How The OPEC Deal Impacts The FX Arena"

Euro: No Longer a One-Way Bet

Lior Alkalay - INO.com Contributor - Forex


It’s been barely five months since the Brexit referendum and yet here we are again, another European referendum, another political battle. This time around, it is Italy’s future in the balance and the Euro’s integrity at stake.

This upcoming referendum, due on Sunday, is a vote for constitutional reform that will abolish Italy’s dual parliamentarian system. Currently, Italy’s Parliament has two chambers, the Senate and the Chamber of Deputies. And, peculiar as it may sound, both have the same powers, but rather than balance they simply paralyze one another.

Why It Matters For The Euro

So, that begs the question, why is a referendum in Italy so important for the Euro? In one word: Banks. In the past few months, the Eurozone economy has started to show some signs of life. Among the data releases, Eurozone Manufacturing PMI rose to 53.7, retail sales in Germany has their strongest monthly gain in five years, and the Eurozone trade balance surplus rose by 37.8% over last year. Even in Italy, the Manufacturing PMI is holding above the 50 level, signaling expansion. All of which is "courtesy of a low Euro” that benefits European exporters. And yet, core inflation in the Eurozone is incredibly low at 0.8% and credit activity is weak, with the M3 level turning stagnant. Even the ECB’s €80 billion in monthly liquidity operations have thus far been insufficient to revive credit growth which is essential for the Euro recovery. At the heart of the problem is Europe’s banking system and its need to capitalize. Continue reading "Euro: No Longer a One-Way Bet"

Sterling Close To A Turnaround?

Lior Alkalay - INO.com Contributor - Forex


Ever since the surprise leave vote in the UK, investors have braced for a financial tsunami that could overwhelm the UK economy. Thus far, there has only been one real casualty—the Pound Sterling. All the while, the UK economy has surprised forecasters. The UK Manufacturing PMI already bounced back to an impressive 55.4; retail sales were surprisingly resilient and, most puzzling to economists, UK 3rd quarter GDP grew at a healthy clip of 2.3% Q3 year-over-year. So, what is really going on? Continue reading "Sterling Close To A Turnaround?"