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FX & Commodities
March 2019
Gold As An Inflation Hedge
Possible change to the Fed’s inflation targeting framework to tolerate an inflation overshoot is likely to increase attractiveness of gold as an inflation hedge.Oil
We see potential for further moderate upside to prices, as OPEC has shown a surprising degree of success in controlling supply.
At the same time, lower prices will restrain U.S. shale producers. As a result, we maintain our 12-month target of US$60/barrel for WTI and US$65 for Brent.
Gold
The gold price rally looks set to take a breather for now although gold is likely to remain resilient as mainstream investors seek protection from market turbulences and potential recessions typically associated with maturing cycles.
Possible change to the Fed’s inflation targeting framework to tolerate an inflation overshoot is likely to increase the attractiveness of gold as an inflation hedge. This warrants an upgrade of the 12-month gold forecast to US$1,380/ounce.
Currency outlook
Relative central bank positioning should continue to be a key theme heading into March. The Fed has effectively entrenched a patient, neutral-to-dovish stance. At this juncture, we think it may be difficult for the Fed to incite further dovish expectations, save for explicitly signalling a rate cut, a step that we think is premature for now. Thus, expect market focus to shift to other central banks, with the flag-bearer being the ECB.
ECB rhetoric surrounding the recent slowdown in Europe’s economic momentum points to March being a pivotal month. Thus, we do not rule out a further dovish shift from the ECB in the coming months.
On balance, we note that rate differentials between the U.S. and other major economies remains directionless on a multi-week horizon, resulting in a lack of directional impetus and range trading among the major currency pairs. We expect this to persist until we see a further deterioration of macro indicators and/or a significant shift in the dovish direction amongst the global central banks.
Meanwhile, overall risk appetite has built up significantly on the back of progress in Sino-U.S. trade negotiations, providing background support for the cyclicals (the Australian dollar in particular). The impact of other geopolitical events remains peripheral at best for now.
Moving forward, developments in the Sino-U.S. trade front will continue to dictate sentiments. Expect developments to come to a head soon, with a Trump-Xi summit possibly scheduled for mid-March.
Elsewhere, the U.K. government and parliament appeared to close ranks by ruling out a no-deal Brexit and agreeing to contemplate a delay in the Brexit deadline. This may have released the shackles on the Pound in the near term.
Back at home, we expect the Singapore dollar to be led by movements in the U.S. dollar and Renminbi. Despite the softer-than-expected economic prints, expect the Singapore dollar nominal effective exchange rate (NEER) to be kept buoyant by the firming Renminbi and stalling U.S. dollar. Nevertheless, given the relative lack of significant policy tightening pressures, we do not expect the top end of the tolerance band to be seriously tested going forward.
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