Oil

Oil demand is recovering well in the US, Europe and China, with pent-up leisure demand for motor fuels likely to more than offset losses from international aviation and India caused by the spread of Covid-19. Renewed reach for inflation hedges could see oil playing catch-up to the recent rally in industrial metals.

OPEC remains confident that recent headwinds will not derail the recovery in oil demand. OPEC+ endorsed the Joint Ministerial Monitoring Committee’s recommendation to press on with the 2 mil barrels/day (b/d) increase in oil production from May to July. As a reminder, the output hikes consist of 350,000 b/d for May and June followed by a 450,000 b/d increase in July. OPEC’s decision on tapering of production cuts when it meets on 24 June will continue to guide the oil balance in 2H2021.

Gold

Stalling US yields, the weaker US Dollar (USD) and rising inflation expectations have lifted gold price back higher. Rising Asia gold imports have also provided support for gold price. China has given commercial banks permission to import a large amount of gold to meet domestic demand according to Reuters. Indian gold imports rose to a record monthly high of 153 tonnes in March amid strong wedding demand. But fresh lockdown in several states in India in response to rising Covid-19 infections could temporarily stifle gold imports in 2Q2021.

Currency

US economic data have been firm throughout April and have mostly outperformed data in other major economies.

The April Fed policy meeting (FOMC) statement alluded to the strengthening economy. Nevertheless, Federal Reserve chief Jerome Powell’s pushed back on tapering, arguing that the Fed is “going to act on actual data, not on a forecast”, and it needs to “see more data”.

Our baseline expectation is for US economic data to remain strong through May, leaving open the possibility that the Fed may sound less dovish in the run-up to its June FOMC.

Thus, it may be difficult to impute further Fed dovishness into the US Dollar. With the 10Y US Treasury yield seemingly headed higher after the recent bottom at 1.53% on 22 April, the gap between US Treasury yields versus G10 government bond yields is re-widening. This should be favourable for the USD. It is therefore possible that we may have seen, or will soon see, the bottom for the broad USD.

Elsewhere, our indicators hint at some nascent risk-on sentiment creeping back in. Overlay this with the commodity complex finding a firmer footing in mid-April – and there may be scope to buy commodity currencies cautiously on dips.

The Canadian Dollar remains our favoured play. The fact that the Bank of Canada is the least dovish amongst major central banks, favours the currency. However, a lot hinges on risk dynamics as well – which has been flippant in recent months. Also, the month of May has seasonally been a risk-negative month and this may affect the Canadian Dollar in the short term.

The weakening positive drivers for the Chinese currency (CNY) – relatively faster economic recovery and elevated yield differentials – have dampened enthusiasm for an outright RMB appreciation in the medium term.

This however does not imply that there will be significant depreciation pressures in the medium term. Expect a broadly range-bound USD-CNY, likely between 6.4000 and 6.6000. Near term directionality for the CNY will be determined by the outlook for the USD, rather than domestic Chinese factors.

Similarly, the rest of USD-Asian currency pairs will take their cue from the broad USD, with domestic factors being secondary drivers for now (except in the case of Indian Rupee). The bias is for the Korean Won and Taiwanese Dollar to outperform the South Asian currencies on better macro fundamentals.

As for the Singapore Dollar (SGD), much of the elevated SGD NEER (nominal effective exchange rate) is attributable to the weak USD. Thus, should the USD trajectory turn in favour of a stronger greenback, we could see the SGD weaken on a basket basis.