As we are nearly at the midway point of the year, key trends in the currency and commodity markets are likely to develop as a host of major events are set to culminate this month.
The outcome of the British referendum on Brexit and the Federal Open Market Committee’s upcoming rate decision will garner all the headlines this month. This should finally give direction to markets, which have been generally been in limbo since the start of the year.
With the FOMC set to convene on June 14 and 15, it is almost certain that there will be no hike this month and the dovish undertones regarding the state of the US economic recovery will garner momentum.
The most recent payrolls report was a disaster and will surely force the Fed to have a long hard look at upcoming rate policy. Last Friday’s jobs report showed that the United States only added 38,000 jobs last month. This was well below expectations of 160,000 jobs, and it was the lowest reading since September 2010. A closer look at the number shows that there were losses in key goods-producing industries amounting to 36,000 jobs (15,000 and 10,000 in the construction and manufacturing sectors, respectively) and 34,000 in information, although this would be attributed to the strike at Verizon.
There were significant downgrades of note in April and March’s readings – April’s gain of 160,000 new jobs was revised downwards to 123,000 and March’s figure was dropped from 208,000 to 186,000. With these downward revisions, that is a combined 59,000 fewer jobs than was previously announced and drags the average number of US jobs added to a paltry 116,000 over the past three months.
The overall unemployment rate improved to 4.7 per cent (from an expected 4.9 per cent). However, this was a result of a shrinking labour force, which showed that the labour force participation rate fell for a second straight month to 62.6 per cent from a previous reading of 62.8 per cent. That equates to 664,000 workers leaving the labour force last month, taking the overall number of those no longer participating to a record 94.7 million.
Perhaps the only silver lining in the report was that wage growth remained constant – month-on-month average hourly earnings came in line with expectations at 0.2 per cent, with the year-on-year figure at 2.5 per cent.
The inconsistencies in last month’s jobs report will no doubt dismiss any chance of an interest rate hike this month and will weigh down expectations of a hike for the rest of this year.
Along with anaemic jobs growth, the US data docket is clearly not doing enough to garner market confidence – US GDP data during the first quarter dropped to 0.8 per cent, with April’s figure revised downwards to 0.5 per cent. This slowing of GDP can be attributed to weakening personal consumption, which fell to 1.9 per cent from an expected 2.1 per cent.
Although inflation targets are on track, the rest of the US growth picture will force the Fed to adopt a wait-and-watch stance, which should benefit currencies and commodities against the US dollar.
The US dollar index is expected to continue to trend between 92.5 and 96.5 throughout the month, and we expect a weaker dollar to benefit gold. The benchmark Dubai Gold & Commodities Gold contract should make another run towards the channel between US$1,280 and $1,300 an ounce this month. The DGCX Euro contract has found consolidation at 1.11 levels. That now forms a key support level, with upsides capped at 1.16 through the month ahead.
And finally, the Brexit referendum is coming on June 23. Momentum is gaining for Britain to leave the European Union – the most recent opinion polls showed yes votes increasing to 43 per cent, with 40 per cent voting to stay.
Opinions on the issue have and will continue to remain fractured in the lead-up to the vote, and the volatility in the pound will remain high.
The ramifications of a Brexit would no doubt be calamitous for the British pound and could cause a strong downward move towards $1.35. However, expect the risk on sentiment to take the pound to the channel above $1.50 should Britain vote to stay.
Gaurav Kashyap is the head of futures at AxiTrader ME.
business@thenational.ae
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