Foreign Exchange & Commodities (March 2017)

Greenback Awaiting Policy Clarity

“Our view remains that Trumponomics will keep the U.S. Dollar good but will not make it great, especially against reserve currencies such as Japanese Yen, Swiss Franc and the Euro.”

- Michael Tan, Senior Investment Counsellor, OCBC Bank

  • The unwinding of post-election U.S. Dollar strength appears mature but the U.S. Dollar will likely remain difficult to trade. The greenback’s struggle to rally was disappointing following slightly hawkish rhetoric from Fed officials and a solid set of upside U.S. data surprises. We expect the U.S. Dollar to move sideways until we see the greater details of the Trump fiscal plans.
  • Elsewhere, oil prices remain resilient despite continued high inventory levels and signs that non-OPEC production is already rising in response to the rebound in prices over the past year. This should limit the upside.
  • Oil prices have been surprisingly resilient in the face of two factors that threaten a reversal. First, inventories remain at unusually high levels, even as we start to come out of the winter season. Demand continues to grow at a steady pace around 2 per cent but it is not strong enough to make inroads into inventory levels.
  • Second, supply is quickly rebounding even though prices are still relatively subdued. The U.S. rig count has almost doubled from the lows of May 2016 and production is already responding. Moreover, the Trump administration’s apparent determination to reduce environmental protection implies an increase in supply of both oil and other fossil fuels.
  • The combination of OPEC controls on excess supply, but the promise of non-OPEC production increasing as prices rise means that oil prices could be set for a period of relative stability. It looks as though the longer-term equilibrium price where supply and demand is in balance is lower than previously thought. It is perhaps in the US$50-60 per barrel range, which implies prices should be stable around current levels.
  • European political risks (e.g. French elections) and uncertainty around U.S. fiscal and economic policy under Trump have supported buying of gold. Safe-haven buying of gold can be strong during periods of geopolitical upheaval and policy uncertainty. The higher near-term gold price backdrop is consistent with our view of gold as a valid asset to hold as a diversifier and hedge.
  • The break of gold price above US$1,250 per ounce is bound to attract attention. The risk that market participants will have to play catch-up is increasing and this could extend the upside to gold. Stronger gold price is likely to attract interest out of China, where participants tend to buy into momentum. However on a twelve month outlook, we are cautious on gold given the risk of a pullback as the political risks subside and as Fed steps up rate hikes further out.