Spotlight on the yuan

IT is without a doubt that the US dollar is expected to strengthen further in 2016 now that the Federal Reserve has finally lifted off on US interest rates. Market players are likely to continue playing to the policy divergence theme, which has dominated the investment landscape in 2015.

While the Fed is on a tightening cycle, central banks in Europe and Japan are on the opposite end attempting to boost growth and inflation via massive quantitative easing. However, low or lower oil prices will complicate the path towards achieving the inflation target, not just for the US, but also for Europe and Japan.

Energy prices continue to lean southwards, as the supply glut looks set to worsen over the course of 2016 because both the Opec (Organization of the Petroleum Exporting Countries) and non-Opec producers are locked in a staring contest. This would necessitate the further use of monetary policies to stoke inflationary pressure, even if their effectiveness is limited by the fact that much of the disinflation or lack of price pressures are due to supply-side factors.