Foreign Exchange & Commodities (September 2017)

Remain Neutral On Gold

“Our view on gold is that prices will remain largely range-bound over the next 3 months, hovering between US$1,200-$1,300 per ounce; but it could briefly break above US$1300 per ounce in September on dysfunctional U.S. politics.”

– Michael Tan, Senior Portfolio Counsellor, OCBC Bank

It is possible that gold prices could briefly break above US$1300 per ounce should risks associated with U.S. debt ceiling and the FY 2018 U.S. budget intensify as President Trump seeks to solidify support among his base to offset declining approval ratings by embracing more controversial positions.

Barring the possibility of brief surge in gold prices above US$1300 in September, our broader view on gold is that prices will remain largely range-bound over the next 3 months, hovering between US$1200-$1300. We remain neutral on gold. There is an underlying appetite to hold gold as a safe haven and hedge against potential tail risks. However, this needs to be balanced against downside risks for gold from market expectations for a more active Fed, which could hike again this December and also begin tapering its balance sheet in September. We are not bullish on the gold price over a 12-month timeframe given the rising rate headwinds.

On oil, the supply–demand balance still looks challenging. Even though consumption has picked up a little, U.S. output is close to record levels and there are concerns over OPEC’s ability to maintain discipline around quotas.

Problems with excess supply lead us to think that the trend for prices is likely to be slightly lower. As a result, we maintain our 12-month price target of US$45 per barrel. Moreover, upside is limited by output quickly rising as more of the marginal shale producers become profitable, but there is the risk of a serious break to the downside if OPEC loses control.

U.S. Dollar
On the currency front, the U.S. dollar is expected to remain under downside pressure in September with headline risks expected to be highly evident. With no surprises from Fed Chief Yellen out of Jackson Hole, expectations of future rate hikes may remain passive, and much will rest upon the Fed policy meeting on 20 September, where balance sheet tapering plans are expected to be announced. Meanwhile, uncertainty about the debt ceiling, the lack of fiscal impetus and the unpredictable nature of policy pronouncements on social media from the U.S. President could also weigh on the U.S. dollar.

Expectations about the ECB’s quantitative easing ending, may send the Euro higher. The ECB has so far not expressed discomfort with the strong Euro and if it maintains this stance, this could be another factor that is supportive of a stronger Euro.

In Japan, the central bank remains sufficiently accommodative and the yen is expected to remain a function of risk appetite fluctuations and U.S. dollar related risks. The Pound meanwhile may continue to underperform its peers on the back of tBrexit baggage as the stance from the EU continues to be less than charitable.

China’s currency has turned around in 2017 -- after three years of losses -- helped by curbs on capital outflows and dollar weakness. If the greenback continues to remain weak, this should continue to favour the Chinese currency with positive spill over benefits for other Asian currencies.