Precious metals

Gold has pulled back from record highs of US$3,500/oz in late April as tariff roll-back improved the US growth outlook, creating less of a demand for safe havens like gold. High gold prices are also starting to hurt some demand, especially jewellery. Nevertheless, we expect gold’s recent price dip will stimulate investment buying, as economic and geopolitical uncertainty linger. Gold is likely to remain well supported by still elevated central bank buying.

Investor confidence in US fiscal health was shaken following Moody’s downgrade of the US sovereign credit rating. The recent failure of US government bonds to protect against equity downside reinforces the merit of gold in long-term portfolios as gold is a valuable hedge against losses in fiscal and central bank credibility. We see room for prices to rebound on a 6-12 month view if the USD weakens, or if fiscal concerns flare up again, driving more exchange traded fund (ETF) inflows. US activity data could likely roll over in the coming months as front-loading unwinds and the sentiment shock dampens spending even as the soft data start to stabilise. We think the trend towards a weaker USD remains intact and continue to favour gold as a protection against recession concerns, particularly as we head into US labour market reports.

Oil

OPEC+ agreed to a third consecutive production surge of 411k b/d in July despite reservations from Russia. A supply surge could add to downside oil price pressures. But US oil inventories are tracking lower than last year, providing downside protection to prices. Investors are also wary of upside risk as additional US sanctions against Russia are now increasingly possible, further clouding the outlook for Russian oil and gas flows. The Russia-Ukraine conflict shows no signs of resolution, with diplomatic channels stalling. The US-Iran nuclear talks continue to inch forward, but with limited progress. A US-Iran deal and easing sanctions could see Brent dipping below US$60/bbl while no deal and even escalatory action could see prices move back to US$70+/bbl.

Oil prices could decline further in the near term on supply concerns, but we maintain our 12-month Brent forecast at US$65/bbl. We think sub-US$60/bbl Brent prices are not expected to be sustainable over the medium term as US shale supply is likely to slow sharply in response to threats to the industry’s profitability. OPEC+ might also decide to pause the unwinding of its cuts if prices decline to sub-US$60/bbl. Lower oil prices could also encourage a re-filling of US strategic petroleum reserve as early as August.

Currency

The US Dollar (USD) was choppy in May, driven by tariff de-escalation (as the US and China struck a temporary 90-day truce) and then re-escalation (US threatened a 50% tariff on EU imports and a 25% tariff on smartphone makers if smartphones are not manufactured in America). President Trump also said that the US would send letters to some of its trading partners to unilaterally impose new tariff rates. it remains unclear whether these new tariffs would be in addition to existing ones or if they would supersede previous rates. Compounding these tariff uncertainties, Trump’s tax & spending bill and Moody's downgrade of the US credit rating have also cast a long shadow over US fiscal sustainability. The Congressional Budget Office (CBO) estimates the bill will add about US$3.8 trillion to the current US debt of US$36.2, over the next decade and the budget deficit may widen to around 7% of GDP in the coming years. While this may stimulate growth in the short term, it raises concerns about the rising trajectory of US debt and budget deficits in the medium term, as well as the associated sovereign risk. These factors, combined with the policy unpredictability surrounding Trump’s tariffs and the erosion of US exceptionalism, could further undermine sentiment and confidence in the USD.

The Euro’s (EUR) performance was mixed in May, driven by dovish ECB rhetoric as well as tariff uncertainties. As the time this was written, the EU and US were in the midst of trade negotiations despite the 50% tariff threat on EU goods. Potential repercussions if the 50% tariff goes ahead, may include a reduction in exports to the US, growth concerns in the EU and deeper ECB cuts to support growth. A potential trade deal between the EU and US may lead to the EUR retracing from its recent highs in the near term. But more importantly, if the “sell USD” trade remains alive amid diversification flows, alternative reserve currencies including the EUR may benefit.

The USD versus the Japanese Yen (JPY) i.e. USDJPY, had a rollercoaster ride in May, driven by the unwinding of JPY-funded carry trades (as long-end yields surged), month-end USD buy flows, tariff uncertainties, inflation data and BOJ rhetoric. The latest CPI report saw core inflation hit 3.5 per cent in April, accelerating at its fastest annual pace in more than two years due largely to a 7 per cent surge in food costs. BOJ Governor Ueda called for vigilance over the risks from food inflation. The hotter-than-expected CPI data keeps BOJ policy normalisation hopes alive. While the timing of BOJ policy normalisation may be deferred, it is not derailed. Fed-BOJ policy divergence and the USD diversification theme should still support the USDJPY's broader direction of movement to the downside. On tariff developments, Japan’s trade negotiator Ryosei Akazawa concluded a third round of talks with US officials including Jamieson Greer and Howard Lutnick over the 24-25 May weekend, while there is chatter that Japanese Prime Minister Shigeru Ishiba may meet Trump in person in June. Japanese officials appear keen to push for a trade deal by the next G7 meeting (mid-June), and there are expectations for some form of currency agreement as part of the deal. If it happens, it may result in a lower USDJPY (depending on the availability of details, as details of such currency agreements may or may not be disclosed).

The USD versus the Chinese onshore renminbi (RMB) i.e. USDCNY, traded lower in May, aided by the 90-day trade truce between the US and China, while the softer USD trend and the consistently lower USDCNY fix (but at a measured pace) saw both the onshore USDCNY and the offshore USDCNH trade lower. We believe policymakers are likely to still adopt a measured approach to appreciation like how they took a measured approach when USDRMB was trading higher previously. Maintaining RMB stability is a key objective for policymakers at this point. Any sharp RMB appreciation may risk triggering exporters rushing to sell their USD holdings and that cycle (if it happens) may result in excessive RMB strength and volatility, which is not desirable for policymakers. With regards to Asian currencies, the RMB does have some influence over the former’s direction, and this is due to trade, investment and sentiment linkages. Our 30-day rolling correlation between Asian currencies and the RMB have also seen a pickup in correlation. If market perception bias about RMB is not negative (or positive like now), then Asian currencies may even appreciate more than the RMB due to the RMB’s relatively lower beta characteristic. Conversely, if the market perception about the RMB turns negative, then this may potentially restrain the appreciation path of Asian currencies and likely have a negative spillover impact onto them.

The Singapore Dollar (SGD) has performed well this year, appreciating by about 6% against the USD year-to-date (YTD) at the time of writing. This is despite moves by the MAS to ease policy twice this year. The resilience was largely due to the SGD’s appeal as a safe haven (against the backdrop of Trump’s tariff uncertainties), solid fundamentals and a softer USD trend. This is also the strongest YTD performance in the last 20 years. We continue to project a mild degree of USDSGD downside, premised on: (i) tariff de-escalation with tariff impact on regional growth largely manageable (i.e. no sharp recession); (ii) expectations for the softer USD trend to continue and (iii) the Fed resuming its easing cycle in due course. Looking ahead, the earlier downgrades to growth and inflation projections for 2025 by the MAS, along with a highly uncertain external environment, suggests that the door remains open for further policy easing, should macroeconomic conditions deteriorate further. But April’s core inflation uptick also suggests that there may be no urgency to ease at the July MPC meeting for a third consecutive time after two back-to-back easing moves in April and January this year. That said, we continue to monitor inflation, growth and tariff developments.