Markets adopted a risk-on approach with equity, currency and commodities notching strong gains throughout last month.
Of note were the performance of the Dow Jones Industrial Average gaining 4.44 per cent in February to 18,132.70 and the DAX index closing at a record high of 11,401.66.
Energy markets also gained, with both Brent and West Texas Intermediate (WTI) crude futures contracts snapping a seven-month losing streak.
Brent gained more than 18 per cent on the month to stabilise over US$62 a barrel, while WTI gained 3.57 per cent to close the month just below $50.
With so much selling pressure weighing down energy markets over the past three quarters, short sellers finally ran out of steam as slight supply disruptions from Libya and Iraq experienced some relief buying, buoying crude, particularly Brent. We do not expect the upward trend to gain any further momentum with both contracts expected to trade sideways through the month ahead.
The export outages are expected to be short term in nature and we expect the increasing supply picture in crude stock, particularly in the United States, to keep any future gains in the WTI contract in check.
At present, the US crude market seems to be oversupplied, with the most recent department of energy data indicating that crude inventories increased to more than 8.4 million barrels in the last week of February.
The weekly crude inventories due out on Wednesday of each week will continue to show build-ups in US inventory, and this will cap any upsides in the WTI contract.
The DGCX March WTI contract will find support between $46.50 and $47.00, with strong resistance coming in at $52-$52.50 levels in the month ahead.
One of the bigger losers last month was gold, which shed more than 5 per cent to close February at $1,213 levels. The precious metal traditionally finds strength in its appeal as a safe haven asset, and with Greece negotiating an extension to its bailout package, much of the euro-zone uncertainty has been put on hold and this has pressured the yellow metal lower.
Gold pricing will continue to remain volatile through March – and we await a move towards the channel between $1,160 and $1,180 before considering long positions.
Interestingly, gold’s inverse correlation with the US dollar has narrowed since the beginning of the year and we continue to watch this relationship.
US dollar movement will be continue to be stoked by future interest rate hikes as the Federal Reserve’s policy expectations continue to take shape through the start of the summer, while gold will continue to benefit from upcoming volatility as Greece will move back into the headlines. The greenback will continue to take cues from the US data docket – which was rather weak last month.
Despite a hawkish Federal Open Market Committee, we saw significant drops in US consumer confidence (96.4 actual versus 99.5 expectation/103.8 previous), inflation (-0.1 per cent actual versus -0.1 expectation/0.8 per cent previous), GDP (2.2 per cent actual versus 2.0 per cent expectation/2.6 per cent previous) and personal consumption (4.2 per cent actual versus 4.3 per cent expectation/4.3 per cent previous).
The data flow this month will be headlined by this Friday’s US non-farm payrolls report, which is expected to show a gain of 240,000 new jobs, below the previous month’s reading of 257,000 new jobs.
Also on tap this month are the rate decisions of the European Central Bank, Reserve Bank of Australia (RBA), Bank of Japan and Bank of Canada.
With all the major central banks expected to hold rates (barring the RBA which is expected to cut to 2 per cent) this could significantly improve the forecast for the dollar against its respective major counterparts.
Gaurav Kashyap is an FX specialist.
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