The greenback’s resurgence: temporary or permanent?

Sterling was trading at $1.67 at the beginning of last week and was set to push $1.70, but it is now trading below $1.63. The euro/dollar rate was over $1.49 a week ago, and is now trading below $1.42. What has the dollar done to deserve such a pull back? Nothing really.

Lat week, Trichet dealt the euro a blow by effectively ruling out an ECB rate rise in June (though July remains a good bet). This saw speculation on further near-term ECB tightening unwound, which helped the dollar. More importantly we heard various news stories of a Greek euro-exit and rumours of a Greek debt restructure, which saw the dollar benefit from strong safe-haven inflows. In addition, commodities prices slid horrifically, and whilst they stabilised in the early part of this week, they have had another bad day today.

There are also growing concerns over global growth, caused by a slow in output from China and monetary tightening from the Peoples Bank of China. With risk appetite well and truly hemmed in, global stocks have fallen and which asset stands to benefit from all this? Safe-haven currency, one of which is the dollar. Gold usually benefits from such widespread uncertainty but a sharp slide in the precious metal is a key contributor to the current environment.

So the dollar is doing well now but should we adapt our forecasts as a result? Working in the dollar’s favour moving forward is that the Federal Reserve’s QEII programme will be brought to an end in June in all probability, which has been a major source of the dollar’s long-term weakness. Assuming eurozone officials reach some sort of agreement with Portugal and Greece over their debt crises (probably in the form of some unsatisfactory bailouts which will only delay disaster, but will calm the markets for now), then confidence should return. Commodity prices seem very likely to bounce back.

I see monetary policy returning to dominate currency movements. Whilst the Fed may be ending QEII, it seems unlikely to raise rates this year and is behind the BoE and ECB. US growth is certainly nothing to get excited about, as shown by today’s disappointing US retail sales growth. So for at least the next month, I expect sterling and the euro to regain the front foot from the dollar (provided the eurozone debt crisis reaches some sort of solution!).

Richard Driver
Analyst – Caxton FX


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Is the rally in commodity prices coming to an end?

In October last year, Brent crude oil was trading at around $80 per barrel. In January this year, it was trading just below $100, and on Monday of this week, it exceeded $126 per barrel, a high not seen since early 2008. However, in the past two days we have seen the price drop by $5 per barrel, and the price of gold has also dropped significantly. This begs the question –has the rally in commodity prices (as driven by oil prices) run out of steam?

The trigger for the recent sharp decline in oil prices on Tuesday can be attributed to Goldman Sach’s, who earlier suggested that investors should take profits after the International Monetary Fund voiced concerns that higher energy prices could hinder the global economic recovery. Speculators quickly jumped on Goldman’s advice; accentuating the price decline and making clear that the drop was the result of an independent intervention from a major market player rather than a natural slide.

So what’s the outlook for oil prices? Well, based on the International Monetary Fund’s downgraded economic growth estimates for the US and for Japan (two of the world’s largest three economies), demand for oil looks set to decline. However, geo-political tensions in the Middle-East are constraining the supply side and OPEC recently announced that Saudi Arabia is unable to increase output to cover the decrease in Libyan output.

In a recent blog on the Wall Street Journal Digital Network, a strong argument indicating that June could be a point at which commodity prices come off their peaks. In November 2008, Brent crude was trading under $50 per barrel, since then it has been on a steady uptrend. What triggered this rally? The Federal Reserve’s quantitative easing programme. – which is set to draw to a close in June; potentially cutting short the supply of funds currently directed into oil futures.

How might this affect the currency markets? Oil producing states such as Canada, Russia, Norway, and other commodity-linked economies such as Australia are currently benefitting from greater profits on their exports. This has been a major factor in the strong performance of their currencies in recent months. If oil prices continue to show signs of topping out, it may trigger investors to take profit on considerable gains made on riskier currencies.

Richard Driver
Currency Analyst – Caxton FX
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