Favour US Dollar Strength
“The US economy continues to outperform the rest of the world, reinforcing our believe that the US dollar strength still has legs in the near term.”
– Vasu Menon, Vice President & Senior Investment Strategist, OCBC Bank
Oil
Geopolitical tensions notably failed to support prices. Widespread criticism of Saudi Arabia has not translated into fears of supply interruption.
The prospect for a significant rebound in prices seems to be limited. WTI is stuck in a range of US$65-75 per barrel, driven by supply flexibility, which seems to reflect the new production dynamics of the industry. This range looks like a sweet spot for producers and is not problematic for global growth, with the impact on inflation already starting to fade.
In the end, increasingly efficient production could pull prices lower, unless the geopolitical situation deteriorates significantly.
Gold
Safe-haven buying of gold has picked up, amid concerns that US corporate earnings may be peaking and given signs of softness in interest rate sensitive sectors such as US housing.
Although an imminent Fed pause scenario is not our base case, if US equities decline further, expect more discussion about such a scenario, which could fuel significant gains in gold price.
Higher US equity market volatility could temporarily push up gold prices, with resistance evident at US$1265 per ounce.
Currency outlook
Heading into November, the major currency themes continue to favour US dollar strength.
Looking ahead, investor jitters may continue to persist in the coming weeks which could spur safe-haven demand for the US dollar.
Furthermore, Fed speakers continue to show nonchalance towards the upheaval in equity markets, staying largely committed to a firm rhetoric in their recent comments. Thus, we think attempts to discount the Fed rate hike path may be premature at this stage.
We also look for the possible re-emergence of rate differentials as a US Dollar-driver, with the 10-year US Treasury yield looking to arrest its October decline.
As for the US economy, it continues to outperform the rest of the world, reinforcing our belief that the US dollar strength still has legs in the near term.
Elsewhere, political stress and weak data look set to weigh on European currencies. The Euro and Pound are near year-to-date lows, with momentum indicators pointing to further pain ahead.
In Asia, we expect investor caution arising from the equity sell-off and the re-ignition of Sino-US trade tensions to be key theme. Thus, the US Dollar should remain resilient versus Asian currencies.
Furthermore, with the Renminbi (RMB) facing pressure, expect little support for the Asian currencies from the Chinese currency. While the official rhetoric from China is firm, we have only seen limited actions to reverse the RMB’s weakness towards the 7-barrier relative to the US dollar. With Chinese economic data still weak, there may little scope for a sustained reversal in the RMB at this juncture.
Back at home, we expect the Singapore dollar nominal effective exchange rate (NEER) to head further north after the slope steepening by the Monetary Authority of Singapore at its October meeting. While a further step towards normalization in the next meeting cannot be ruled out, we expect it to be data-dependent and detect no sense of urgency.
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