Oil

Oil prices could stay higher for a bit longer, supported by stronger demand signals and elevated geopolitical risks amid continued OPEC+ cohesion. The trough in global manufacturing purchasing managers’ indices (PMI) points to firmer manufacturing activity and, as a result, oil demand. In addition, new Ukrainian drone attacks on Russian refineries reignited concerns about the potential for supply disruption to Russian oil exports.

However, ample spare OPEC capacity should help cap Brent oil price upside to US$90/barrel. OPEC+ announced a three-month extension of its existing production cuts through 2Q24. Expectations of the OPEC Joint Monitoring Ministerial Committee recommending any change to its supply policy are not high for now. But any signs of members not adhering to current production quotas will be seen as a bearish sign for oil prices. A continued loss of market share could lead to key OPEC+ producers with spare production capacity exceeding quotas at some stage. Our base case is not for a runaway oil market, as solid non-OPEC supply growth still points to lower oil prices in a year’s time.

Gold

As gold is a zero-yielding long duration asset, changing Fed rate expectations – which affect the US Dollar (USD) and US interest rates – has historically been a reliable driver of the precious metal’s prices. But gold’s recent surge cannot be fully explained by shifts in Fed rate expectations. Gold exchange-traded fund (ETF) holdings continued to grind lower amid a paring of Fed rate cut bets year-to-date. This suggests that the macro backdrop may not be the big story behind the higher gold prices.

There are structural shifts in demand that will support gold independent of the macro backdrop. First, Emerging Markets central banks have stepped up gold buying after the US weaponised the USD in its sanctions against Russia for its invasion of Ukraine. Second, retail gold buying in China has increased as returns from property and stock market investments disappoint, and deposit rates remain low.

The macro backing for gold will strengthen if central banks do start cutting rates. We have been bullish on gold for some time now and remain so. But some consolidation would be healthy after the recent price jump. There is still enough dry powder for nominal gold prices to head higher in 2024. We recently upgraded our 12-month forecast for gold to US$2,300/oz.

Currency

Near term, the US Dollar (USD) still offers a relative yield advantage versus most other major currencies, and the US Federal Reserve (Fed) has communicated that it in no hurry to cut interest rates. The USD may continue to stay supported until US data starts to show more signs of softening. Overall, we remain biased towards a moderate softening of the USD in the medium term as the Fed is done tightening and should embark on a rate cut cycle in due course. A more entrenched disinflation trend and further easing of labour market tightness, along with softness in other activity data in the US, would be required for the USD to trade on a backfoot. This, however, requires patience.

Inflation readings in France and Italy have come in softer while recent ECB rhetoric seem to have taken a dovish tilt. European Central Bank (ECB) Governing Council member Yannis Stournaras said that a total of 100 basis points (bps) in rate cuts for 2024 is feasible, if the disinflation trend continues until the end of the year. Else whereewhere, ECB policymaker Francois Villeroy de Galhau, said that the central bank cannot ignore the economic risks of keeping rates high for too long, and should begin rate cuts at its April or June meetings. Markets are also fully pricing in a June rate cut and a total of 89 bps in cuts for this year. We maintain a neutral outlook for the Euro (EUR). The economic slowdown in the Euro-area needs to show clearer signs of stabilisation for the EUR’s losses to moderate. Failing which, a scenario of an earlier ECB pivot amongst the G3 majors would see the EUR trade on the back foot.

The Bank of England’s (BOE’s) vote count at its recent policy meeting showed that no member in the Monetary Policy Committee supported a rate increase - the first time this has happened since September 2021. However, this does not imply a dovish pivot. The two BOE officials who made the switch from voting for a rate hike to voting for a hold gave interviews to the media to explain their motivations. Catherine Mann said markets are pricing in too many cuts and that BOE is unlikely to lead a global shift to cut rates, as the wage and services dynamics in the UK are stronger and more persistent than in US or the Euro area. Jonathan Haskel said that interest rate cuts should be “a long way off” and he favours a later start and a slower pace of monetary easing. Haskel voted to hold, partly because of better-than-expected inflation figures but stronger wage growth and stickier services inflation means that the BOE is unlikely to pre-empt the Fed with an interest rate cut. In summary, both members did not seem dovish given their comments and reference to sticky wage growth and services inflation. We are still of the view that the BOE will not be amongst the first Developed Market central banks to cut rates. We still see a mild upward trajectory for the Pound (GBP) as the BOE may keep rates restrictive for a little longer as inflationary pressure remains. A potential BOE-Fed policy divergence may also be supportive of the GBP.

The USD continued its appreciation against the Japanese Yen (JPY) even after Bank of Japan (BOJ) exited its negative interest rate policy and yield curve control last month. Markets are of the view that BOJ policy normalisation will be gradual, and that the JPY remains an attractive funding currency since the Fed is in no hurry to cut rates. However, we remain cautious give the risk of being too negative on the JPY, especially if the currency’s weakness is rapid or excessive. While it is popular belief that 152 for the USDJPY cross may be the line in the sand, we think that it is more of the magnitude of moves that may matter. Elsewhere, data from the Commodity Futures Trading Commission show record shorts on the JPY and we reckon Yen bears may be complacent and under-prepared for any policy surprises or actual BOJ intervention. Looking out, we still expect the USDJPY to trade lower on the back of a moderate-to-soft USD profile (as Fed is likely to embark on rate cuts soon) and on expectations that the BOJ has room to further pursue policy normalisation amid higher services inflation and wage pressures in Japan. But near term, the USDJPY may remain elevated as the Fed is in no hurry to cut rates and markets still perceive that the BOJ will be move very gradually with policy normalisation.

The recent volatility of Renminbi (RMB) and JPY have been key drivers of the Singapore Dollar’s (SGD’s) weakness. To some extent, there remains lingering uncertainty on the RMB. Markets are fearful that Chinese policymakers may allow another round of depreciation. However, such fears were somewhat partially pushed back after the PBOC set a stronger daily fix for the RMB in late March. Nevertheless, the continued rise of the onshore RMB spot towards the 2% upper band reflects uncertainty about the outlook for the Chinese currency. Persistent weakness in onshore CNY will continue to undermine broader sentiments in the short term. In its April monetary policy statement, the Monetary Authority of Singapore (MAS) kept its policy unchanged. The decision was widely expected. The central bank reiterated that core inflation is expected to stay elevated between the second and third quarters of this year but remains on moderating path before easing in the fourth quarter and falling further into 2025.

The MAS also reiterated that both upside and downside risks remain for inflation. Shocks to global food and energy prices, or stronger-than-expected domestic labour demand could induce additional inflationary pressure, whereas an unexpected weakening of the global economy could result in a faster easing of cost and price pressures.

Looking ahead, the window to ease monetary policy is open for the second half of this year, but it will be data-dependent. If core inflation shows signs of subsiding earlier or more materially than anticipated, then policy could be eased in July or October, although this is not our base scenario at this juncture.