By Gaurav Kashyap
Currency and commodity markets managed to pare some of their earlier losses in August to end the month largely flat. We saw the Dubai Gold and Commodities Exchange euro /US dollar contract move from 1.17 levels to as low as 1.13 in mid-August before paring these losses to end the month on a level.
Similarly, DGCX’s British pound contract covered 65 per cent of the downside move experienced in the early part of August to end the month marginally lower (minus 1.15 per cent). The moves seen in the second half of August may not be so much a case of change in the global themes we have been following, but can be considered a correction or a retracement following the bearish moves that saw these asset classes selloff over the past two quarters.
Emerging markets still remain at the forefront of investor sentiment; in August we noted that Turkish sanctions had crippled investor appetite leading to the Turkish central bank reaffirming on Monday an adjustment of the current monetary stance in September’s meeting. While this halted any further slide in Turkish asset classes, the developing story in Argentina has seen investor appetite stay in check. With the Argentinian Peso slipping to record lows, gold also benefitted following the developments.
The precious metal on DGCX has moved above 1200 levels, after bouncing off those 1160 lows in mid-August. In a previous column, I noted a downside towards 1180 which was easily filled, and the upside resistance level at 1220 looks good to hold with gold expected to consolidate in the current channel through September.
With trade risks in full flow, the US dollar has also consolidated with a slight bullish bias. The Dollar Index, which broke above the 95 handle in August has continued consolidation above these levels. It is my expectation this dollar bullish bias will continue to hold through the end of summer. The currency still has much going for it – fundamentally there will continue to be a large flow into dollar-denominated assets as the Federal Open Market Committee continues its rate hiking cycle, with a minimum of two more increases expected in 2018.
The ongoing trade wars story (Trump this week announced the potential of around $200bn in additional tariffs on Chinese goods) will continue to be a driving force for the dollar, which does not seem to be at too much risk until the mid-term elections come around in November.
While the British pound managed to test 1.30 levels last month on the DGCX, we maintain our view that a move towards 1.23 will materialise in the weeks ahead. Expect to see volatility pick up in sterling crosses next week when the Bank of England announces rates on September 13. While the BOE increased rates last month to the current 0.75 per cent, I do not expect to see a rise this month and expect to see the Monetary Policy Committee voting pattern to remain unchanged at 7-2. While UK economic drivers have not deteriorated too much since their last meeting, a surprise dovish vote could see an exaggerated downside move in sterling crosses. However, the likelihood of a change of vote seems unlikely.
It’s a big two weeks for the US data docket – two key pieces of data to look out for include the US non farm payrolls report due out this Friday followed by the US inflation report due out on September 13. Starting with the former, payrolls are expected to come in just below 200,000 while the overall unemployment rate is expected at 3.9 per cent.
Don't expect to see too much of a variance in these stats, but do expect a weaker reading to weigh down the dollar and vice versa. The key metric in Friday’s report will continue to be average hourly earnings and this should be a stronger indication of dollar pricing through the rest of the week.
Remember average hourly earnings is an important metric to understand US inflationary conditions, which of course will be the main focus of the Fed when they convene later this month. That overall inflation print due out next week will also be a key driver in market volatility and is expect to come in at 2.8 per cent year-on-year.
Gaurav Kashyap is a market strategist at EGM Securities
The views and opinions expressed in this article are those of the author and do not reflect the views of EGM Securities.