USD weakness takes centre stage

Global Markets

Global equity markets continued their recent run of form with positive momentum remaining as the theme for the financial markets as they concluded trading for the week. Although there are still elevated risks when it comes to the global economy, increased expectations that central banks will support global growth by easing monetary policy further raised sentiment towards the equity markets. The significant rally in price of oil last week also improved confidence, specifically for the FTSE 100 which has a strong correlation to mining stocks.

When it comes to the currency markets, USD weakness took center stage and dominated trading as last week drew to a conclusion. Although the FOMC minutes once again repeated the Federal Reserve’s intentions towards interest rates in 2015, the minutes continued to highlight that there is still complete confusion and an ongoing lack of clarity on the probable timing of a US interest rate rise. This exposed the USD to further pressures against its trading partners.

As each week passes by without the Federal Reserve at least providing guidance on when US interest rates could be raised, the expectations that a rate hike will happen at all this year is weakening, with this exposing the USD to excessive pressure. This results in a nightmare scenario for the European Central Bank (ECB) because they are witnessing the Eurodollar bounce higher despite sentiment towards the European economy remaining bleak. The Eurodollar has jumped to a monthly high at 1.1386 on the USD weakness which will encourage the ECB to repeatedly threaten further QE in the hope of preventing investors from purchasing the Euro.

GBPUSD awaits UK inflation report

While further encouragement was provided to GBPUSD traders last week that the 1.51 level is a likely “bottom” for the pair, the GBPUSD is now finding it difficult to successfully close above its 200 Simple Moving Average on the Daily timeframe. Until the GBPUSD successfully closes above the 1.5320 area more than once, it’s going to be difficult to envisage the pair rallying towards 1.55.

There are a few concerns over the UK economy at present with the major one being that recent data has suggested that the usually robust United Kingdom might also be suffering from a decline in economic momentum. Repeated comments from Bank of England (BoE) policymakers that they still intend on raising interest rates over the next year will prevent the Pound from an aggressive period of weakness, but another weak inflation reading this coming week might also remind traders that the BoE will not be raising interest rates until at least the second half of next year.

Commodities

Gold is gaining positive buying momentum from the pushed back US interest rate expectations with the metal rallying nearly $60 following the unexpectedly poor NFP report at the beginning of the month. Gold is strongly benefitting from the pushed back US interest rate expectations and as the markets continue to price these pushed back expectations into the USD, Gold will continue to enjoy further momentum. With the chances of a US interest rate rise narrowing each passing week, investors in Gold are finding opportunities to continue purchasing the metal. The September highs at $1170 are seen as major resistance for Gold, with current prices slightly below $1160.

Buyers in WTI continued to find encouragement from the United States government report expressing that the frequently mentioned oversupply in the oil markets might have already peaked with this being supported by another decline in US oil rigs being confirmed on Friday afternoon. The commodity reached a near three-month high slightly below $51 on Friday and with prices now rising above $50, $54 is being viewed as the next major resistance for WTI.

While the current rally is encouraging for commodity exporters, we have previously seen the price of WTI fall like a house of cards following a strong rally and it will be interesting to see if any hesitance from central banks towards easing monetary policy further or ongoing global economic concerns encourages a sudden reversal.

Emerging Markets

The UAE markets failed to gain as much momentum as you would normally expect with such a rally in the price of oil, and this suggests to me that there is still some anxiety among investors that the currency rally in the commodity might not be long-lasting. With the USD also suffering weakness as a result of the pushed back US interest rate expectations, the currencies pegged to the USD are also declining. The Dirham is for example slipping lower against the Euro and might still be risk to a decline against the Japanese Yen.

The Malaysian Ringgit has received a huge vote in confidence from the improved sentiment towards WTI, with the Ringgit advancing strongly against the Dollar on the higher oil prices. Local Malaysian markets have enjoyed the rally in the price of WTI with this improving sentiment towards the Malaysian economy. Although the USDMYR is still priced considerably above 4, the stronger buying momentum towards the commodity markets is allowing the opportunity for the Ringgit to recover from what has been extreme losses over recent months.

The Indonesian Rupiah also enjoyed an opportunity to recover losses following the unexpected rally in the commodity markets, with the Indonesian economy being a major commodity exporter. Indonesia is a major exporter to China meaning the economy will face downside pressures with demand for its products from China likely to decline, however some stability in the commodity markets would raise investor confidence towards Indonesia.

After the Reserve Bank of India commenced October with another and even larger than expected interest rate cut, the Indian Rupee has recovered to hit an eight-week high against the Dollar. There are a couple of reasons why the Indian Rupee is recovering momentum with USD weakness helping. On top of this, the Indian economy is performing strongly and there is confidence that the RBI have acted very quickly this year to support economic growth. There is also the feeling that after so many interest rate cuts in 2015, the RBI should have concluded easing monetary policy for now which would encourage inflows into India.