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By Gaurav Kashyap
June has been an inspirational month for dollar longs. Building on the back of two consecutive months of gains, the greenback was in a rampant mood at the half way mark of the month.
Last week’s double dose of increasing inflation data (the US's year-on-year consumer price index came in at 2.8 per cent versus the 2.7 expected and 2.5 per cent previous) and a hawkish Federal Open Market Committee spurred the Dollar Index to the 95 handle. While the increase in US rates to the revised 1.75 to 2 per cent band was priced in, it was the upgrades to future US economic projections and a largely optimistic tone that rallied dollar bulls.
The Fed noted that the economy was growing at a “solid” rate, an upgrade to the “moderate” rating adopted in May’s meeting. There were upgrades to the expected unemployment rate (from a median rate of 3.8 per cent forecast in March to the revised 3.6 per cent in June) and overall GDP is expected to grow to 2.8 per cent versus a march forecast of 2.7 per cent. Perhaps most notably, the release all but cemented the need for two additional rate hikes through the rest of 2018.
While the dollar tested 95 levels in the aftermath of the announcement, long positions ran out of steam as the Index finds itself currently consolidating in the mid 94 range. We would need to see a daily closing above that 95 level to conclude that the dollar is due up for another leg higher towards 97 through the summer months. Levels of 93.60 would need to hold through the weeks ahead to maintain this bullish bias in the greenback.
Despite the bullish mood in US financial markets, US equities remained rather unenthused. While our 2675 downside target is yet to materialise – the upside resistance stills holds true at 2800 as shared in my last publication. We saw 10-year treasury yields spike above 3 per cent following the Fed announcement, and as long as there is consolidation below these levels, gains in US equity markets will remain in check.
The dollar move has taken its toll on the euro, which found itself in the middle of a selling spree following the European Central Bank rate decision last Thursday. While Mario Draghi and the ECB kept rates unchanged, the president signalled an end to their massive 2 trillion euro, three-year asset purchase plan this December. However it was his dovish stance towards future interest rates – a pledge to not raise rates for another 12 months that spooked forex markets, which had until that point priced in a more than 30 per cent chance of an ECB rate hike within a year.
The dovish sentiment rallied European bourses, but sparked a large downside move in the euro, which slid more than 1.88 per cent against the US dollar. After testing lows at 1.1560, the EUR/USD contract on Dubai Gold & Commodities Exchange is consolidating at that key 1.16 levels discussed in my column earlier this month. We would expect further pressure on euro prices heading into July, with 1.1430 the next strong support level.
Crude oil was trading lower on DGCX heading into the Opec meeting on June 22. The global energy picture is intriguing to say the last – while last week’s crude report showed massive drawdowns in inventories (crude oil inventories came in at 4.1 million barrels versus the 1.440 million expected and the 2.02 million previous), however data showed that production spiked up another 100,000 barrels a day, taking the 2018 total to a record high of 10.9 million barrels of output a day.
Crude markets have been shrugging off hints by Saudi Arabia and Russia that June may be the meeting in which they vote to cease the production cuts. If such a move were to materialise, our earlier downside targets in the band between 60-62 would come into range.
Along with the Opec meetings taking place on Friday, the Swiss National Bank and the Bank of England announce rates on Thursday with the US and UK GDP readings due out next week on June 28 and June 29 respectively.
Gaurav Kashyap is a market strategist at Equiti Global Markets