Financial markets have shown signs of stabilizing recently after experiencing increased volatility in the first few weeks of the year.
In the United States, the latest economic data pointed to weakening growth, a sign that economic activity is stalling.
That cooled market expectations for an interest rate hike in March.
The Federal Reserve has signaled four rate hikes are likely in 2016 but the market expects just one or two.
Continued market turmoil and subdued inflation could hold back the Fed from hiking interest rates anytime soon.
Also, US inflation slipped surprisingly in December due to plunging oil prices. It has remained below the 2 percent target for a third straight year.
The closely watched personal consumption expenditure (PCE) index eased to 1.3 in November.
In this case, the Fed might reassess its future policy direction given record-low oil prices, a China slowdown, a falling yuan and a global equity rout.
The US dollar index has hovered around 97 and 100 since the rate liftoff in December.
Nevertheless, the greenback might weaken if a second rate hike is delayed. That would result in higher commodity prices.
If that happens, emerging markets might stem capital outflow and the Chinese yuan might face less depreciation pressure.
Gold could hit US$1,150 per ounce given a weaker US dollar.
Historical data shows that the US dollar usually peaks before a new rate hike cycle and starts to ease after the first rate increase.
Oil prices have a close correlation with gold since the former is a gauge of inflation.
Gold is viewed as an investment tool and a hedge against inflation.
Crude oil prices have slumped 75 percent in the past two years, largely due to oversupply, weighing on on global inflation and prompting major central banks to keep interest rates low to support economic growth.
If oil prices rebound to US$30 per barrel this year, major sovereign wealth funds would experience reduced redemption pressure.
In turn, that would help underpin global equities.
Investors would have improved risk appetite and return to arbitrage trading.
By then, interest in high-rate currencies such as the Australian dollar and New Zealand dollar would have recovered.
Central banks in New Zealand and Japan are likely to keep their benchmark rates unchanged.
The market is closely watching whether the Japanese central bank will change its economic and inflation forecast given that lower oil prices would make the 2 percent inflation target less achievable.
In any case, Bank of Japan may not change its stance on monetary easing.
That will give the Japanese yen room to consolidate against the greenback at 116 to 121.
This article appeared in the Hong Kong Economic Journal on Jan. 29.
Translation by Julie Zhu
[Chinese version 中文版]
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