2016 started in a challenging way for financial markets, as Chinese stocks dropped by 7%, the Chinese currency’s mid-point was set at a fresh low by the People’s Bank and an index of manufacturing activity in the country showed contraction and was well below expectations during December.
This of course had a negative effect on the Australian dollar, which fell by 1% against its US counterpart at 0.7216. China is the top destination for Australian exports.
The US dollar itself was facing difficulties as it fell below the 120 and then below the 119 level against the yen at 118.74; a 2 ½ month low. Risk aversion and heightened geopolitical uncertainty was seemingly hurting the greenback and boosting the relative safe havens of the yen and the euro. Dollar / yen was trading at 118.91 while euro / dollar climbed above the 1.09 level at 1.0937.
Saudi Arabia, the leading Sunni Muslim nation in the Middle East, appeared to be raising the stakes in a confrontation with the region’s leading Shiite power of Iran, after it decided to break off diplomatic relations with the country. Saudi Arabia was responding to violent demonstrations against its embassies in Iran, which were sparked after the execution of a prominent Shiite cleric in Saudi Arabia.
The dispute between Saudi Arabia and Iran helped oil prices to briefly rebound above $38 a barrel, before heading back towards the $37 level.
Looking ahead, the day’s key event will likely be the ISM manufacturing report for December from the United States later during the US session. The index is expected to remain in contraction territory at 49. During the European session, UK manufacturing PMI as well as German preliminary inflation numbers for December will be key. German inflation will be important to watch ahead of tomorrow’s flash inflation for the Eurozone. The markets’ attention this week will be fixed on the US employment report which comes out on Friday.