Foreign Exchange & Commodities (November 2016)

Don't Chase the U.S. Dollar Rally

"A Fed rate hike and QE extension by the ECB in December should keep the greenback well supported, but we still see the currency as more range-bound versus G10 currencies than in a strong appreciation trend."

- Michael Tan, Senior Investment Counsellor, OCBC Bank

  • We do not expect the U.S. Dollar to set new highs moving forward for a few reasons. First, U.S. core inflation data is still not strong enough to merit a rapid Fed tightening. Also, other major central banks may not have the scope to ease monetary policy significantly beyond current levels. Second, while China has come back as a potential worry, we are less concerned of the CNY weakness triggering a sustained global risk sell-off that would fuel safe-haven demand for the USD.
  • In relation to the Yuan, the higher USDCNY fixings recently are more a reflection of USD strength as opposed to an outright sharp devaluation. Thus, we dismiss fears of ‘accelerated CNY depreciation’. Our view of orderly and gradual Yuan depreciation trend remains unchanged.
  • In terms of the Sterling, we believe Brexit developments rather than economic data will continue to drive movements in the currency. Uncertainty surrounding Brexit negotiations could nudge the sterling below 1.20 against the U.S. Dollar over the next 3-6 months.
  • The European Central Bank (ECB) could extend their Quantitative Easing (QE) programme in December at the current pace, but we believe this is now broadly priced in at current levels.
  • Diminishing downside risk for oil prices on the back of speculations that an OPEC deal is forthcoming continue to support Emerging Market FX high-yielders such as IDR, INR, RUB and BRL. However, given the number of approaching event risks such as the U.S. elections, Fed December hikes and Brexit negotiations, it is prudent to take only measured exposure to these risky trades and hedge against any potential short-term risks.
  • We are not long-term gold bulls, but gold remains a useful portfolio diversifier on a 3-6 month timeframe. There are enough potholes to navigate, including the U.S. elections, Italian referendum and Brexit considerations to name but a few, to still warrant a buy-on-dip bias on gold over the next few months. We would thus view a gold sell-off below US$1,240 as a strategic buying opportunity.
  • Moderate slippage in oil inventories over the past few months suggests that supply and demand forces are roughly in balance. As it stands, prices seem to be normalising around the US$50 level. We believe the longer-term equilibrium oil price should hover within the US$50-60 range. This implies prices should be stable around current levels.