Market analysis: All eyes on US figures and ECB meeting

Mixed performance from the greenback, while euro touched lowest since January.

The US dollar turned in another mixed performance in May, closing the month stronger against a basket of currencies, while US equities made significant gains against the greenback. The euro shed close to 1.6 per cent in May, its lowest since January as speculation increased that European Central Bank president Mario Draghi could introduce further stimulus for the euro zone in a bid to boost economic growth.

A weekly Commodity Futures Trading Commission report showed that officially, the net positioning in the euro has skewed to the sell side, with net shorts increasing to in excess of 16,000 to close off May, compared with net shorts of about 9,000 from a week earlier.

At the ECB policy meeting in early May, Mr Draghi refrained from introducing any additional stimulus measures, which resulted in the euro spiking towards 1.40 levels against the dollar.

However, his most recent comments that the recent bull run in the euro was “cause for serious concern” heightened speculation that at Thursday’s ECB policy meeting, we could see interest rate cuts across the board. This could also include a cut to the deposit facility rate to a revised -0.10 per cent, cuts in the marginal lending facility rate to 0.60 per cent from 0.75 per cent, and finally cuts to the main refinancing rate to 0.10 per cent from 0.25 per cent. Despite markets positioned for slashes across rates in Europe, the euro is expected to find support at 1.3486 followed by 1.3360 in the month ahead.

The Indian rupee was the star performer among Asian currencies last month, closing 1.7 per cent stronger against the dollar to reach a one-year high. The positive outcome from the general election has improved sentiments in India which could mean improved FDI flow and investor confidence return to the once-roaring tiger.

Despite the recent renewed capital inflows, data from Friday showed that the newly elected Bharatiya Janata Party had much work on its hands. Despite soaring consumer prices, last week’s GDP reading showed that growth once again fell below 5 per cent in May – to come in at 4.7 per cent. Dragged lower by the headline manufacturing number of -0.7 per cent, it was the seventh quarter in eight that the Indian economy recorded a GDP reading of less than 5 per cent.

We expect the recent bull run in Indian markets to continue through June, particularly with continued gains expected to take the rupee towards 58 levels against the dollar. However, the recent run of data will be a stark reminder of the current state of affairs and will keep any gains in check.

Gold sold off rather aggressively in May and closed the month below US$1,250 a troy ounce, its lowest since February. With the ongoing political tensions in Eastern Europe well and truly on the back burner, profit-taking on long positions has resulted in pricing in gold remaining anaemic at best. We expect the precious metal to consolidate in the channel between $1,230 and $1,250 in the month ahead.

And finally, all eyes will be on the monthly US non-farm payroll report to get an accurate gauge of the current state of economic affairs in the US. Expectations are for gains in excess of 200,000 for May, with the unemployment rate expected at 6.9 per cent. A gain of 200,000 would, no doubt, be a solid turnout for the US labour market. However, we will continue to watch for the participation rate to gauge the true conditions of the market.

With the baby boomer era reaching retirement age and slowly leaving the workforce, we have seen rather aggressive improvements in the overall unemployment rate. However, these gains are misguided and as a result of a deteriorating participation rate, we would need to see this number improving (increasing), or stabilising at the very least to get an accurate gauge of what is really happening in the US labour market.

Gaurav Kashyap is the head of futures at Alpari Middle East

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