Market conditions have been choppy this month, with currency majors going on the back foot against the US dollar.
After losing 3.2 per cent last month, the Dollar Index showed signs of recovery, moving back above 100 levels and recovering 60 per cent of January’s losses. There have not been many political or economic developments of note so far this month and a lot of the movement can be attributed to profit-taking and markets generally positioning themselves for next month.
Perhaps the key piece of data from the past two weeks was the US inflation reading, which showed that US prices increased month-on-month to 0.6 per cent (compared with expectations of 0.3 per cent and a previous reading of 0.3 per cent). The core reading, which consists of prices less food and energy, also showed growth to 2.3 per cent year-on-year (compared with expectations of 2.1 per cent and a previous reading of 2.2 per cent).
With a shift in the US Federal Reserve’s rhetoric to be more price-focused, markets took the better-than-expected inflation data as a positive for the dollar, which kick-started a mini bullish move for the Dollar Index.
With a host of Fed speakers this week culminating with the Fed meeting minutes, markets will pay close attention to the rhetoric, which will generate movement in the Dollar Index.
Next week’s US GDP reading is expected to show growth of 2.1 per cent versus a previous reading of 1.9 per cent. If the figure does in fact come above 2 per cent, we can expect more support for the US dollar.
The major currencies, including the euro and the UK pound, have been weaker throughout this month but held within range. My near-term support level at 1.23 still holds for the pound, with upsides capped at 1.27 levels through the end of the month.
The lower end of this channel could be tested tomorrow with the release of the UK GDP reading. Expectations are for a growth of 0.6 per cent quarterly, with a year-on-year growth of 2.2 per cent. While we do not expect any major drawdowns in this figure, it is important to note that the data from the UK has started to show signs of a slowdown.
Last week’s UK inflation data showed price contraction across the UK in January month-on-month, with the reading coming in at minus 0.5 per cent (compared with a previous reading of 0.5 per cent). Data also showed that retail sales were hit hard in January, with month-on-month sales dropping to minus 0.3 per cent (compared with an expectation of 0.9 per cent, with the previous month’s reading revised downwards to minus 2.1 per cent). Year-on-year retail sales growth was a paltry 1.5 per cent (compared with expectation of 3.4 per cent and a previous reading of 4.1 per cent). While the figures could indicate a hangover effect following the holiday season, it is quite possible we are starting to see the lag effect of the Brexit vote on the UK data docket.
Similar to the pound, the Dubai Gold & Commodities Exchange’s (DGCX) euro contract was choppy and on the back foot against the dollar. I maintain a neutral to slightly bearish view in euro versus the dollar, with the next target at 1.0515 levels still holding, with resistance at 1.0860 throughout next month.
Crude has been trading sideways through the month – despite massive build-ups in inventory. Data from last week showed that the US had excess supply build-ups of 9.527 million barrels compared with an expectation of 3.513 million barrels.
But the larger story in crude markets has been the compliance by Opec members to proposed cuts from their meeting in November. This has kept crude markets well bought and has seen the DGCX’s WTI contract normalise in the $50 range. My strategy of initiating long positions after corrections below $52 per barrel remains intact, with exits above $54 per barrel.
And finally the DGCX’s benchmark Indian rupee contract continued building on its gains from the past few months against the greenback, breaking through the 67.00 levels yesterday. The rupee has benefited from the Reserve Bank of India’s move to keep interest rates unchanged for a second consecutive meeting while hinting that the rate-cut cycle would be on hold for now. This triggered a bullish move in the rupee, which saw the pair surge to three-month highs.
Gaurav Kashyap is an FX trader based in Dubai.
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