Foreign Exchange & Commodities (October 2016)

From Policy to Politics

"Fed inaction at its September meeting leaves the U.S. dollar vulnerable for now. However we do not expect the setback to last given Fed’s readiness to hike interest rates in December."

- Michael Tan, Senior Investment Counsellor, Wealth Management Singapore - OCBC Bank; Member of OCBC Wealth Panel

  • We are back to yield hunting following the Fed’s inaction in September. The U.S. Dollar will likely trade sideways after losing some ground.
  • The U.S. elections will be the main market theme as central banks take a break. The possibility of Trump win is negative for currencies that would be affected by his anti-immigration and anti-trade rhetoric. A Trump victory carries higher risk of policy uncertainty but it is unclear if this would be broadly negative for the U.S. Dollar.
  • The likelihood of a Trump presidency could weigh on the U.S. Dollar versus reserve currencies such as Japanese Yen, and also versus gold. Trump’s victory also poses a negative for Asian currencies, given the risk of rising global trade tensions.
  • The BOJ policy to steepen the yield curve is good for the financial sector but does not matter much for USD/JPY given that there is no addition of monetary stimulus. The fact that USD/JPY is below the pre-BOJ level shows that the Fed matters more than BOJ in driving USD/JPY.
  • We expect USD/JPY to hover in a broad ¥100-110 range for the rest of 2016, with the downside capped by expectations of closer coordination of monetary and fiscal policies in Japan.
  • A patient ECB (the central bank is not rushing to ease policy) is a positive risk for the EUR. Extension of QE by ECB in December and resumption of Fed rate hikes by end-2016 should limit the risk of EUR becoming the new JPY.
  • However, upside risk to EUR will amplify if perceived European political risk unexpectedly turns begin.
  • The MAS is likely to maintain its neutral slope stance in the upcoming policy announcement in mid-October, judging from hints of a slightly more positive take on Singapore’s core inflation outlook.
  • But given prospects of below-trend growth and a softening labour market, we believe that MAS would like to see SGD/NEER trade in the weaker half of the policy band.
  • Gold losing steam on worries over hawkish Fed but prices should find support around US$1,300.
  • Gold bulls are likely to remain wary of hints that the Fed might raise rates in December. We maintain the view that gold will continue to trade in a new higher range of US$1250-1400 for the rest of 2016. Implied volatility for gold options is back near the lows of the year.
  • Oil rebounded in August as speculative short positions were cut on rumours of supply restraint, but there is a lack of fundamental drivers to produce a significant move in prices.
  • The equilibrium price where long-term supply and demand is in balance is an unknowable number, but most specialists put it in the US$60-70 range.