Weakness continued in the US dollar through the end of January as the Dollar Index tested 90 levels for the first time in four years. The dollar has been underpinned by waves of bearish sentiment, the most recent of which stems from the government closure, which began on Friday.
The US government finds itself breaching its debt ceiling, and with Washington entrenched in political gridlock, the Republicans lack the necessary majority in Senate to get the ceiling raised. We are entering day four of the shutdown, with only non-essential government services closed so far. But expect to see further erosion in US asset classes, including the dollar as this debate prolongs.
The US government shutdown will no doubt have an impact on the US GDP reading due out this Friday. Expectations are for a quarter-on-quarter reading at 3 per cent, however, a weaker print would not be unexpected. With overall short-term and medium-term dollar sentiment entrenched firmly in the bears corner, positive data points on the economic calendar could see short term spikes in the Dollar Index.
We are watching for the US non-farm payrolls report, due out on February 2 to perhaps trigger some dollar buying. Last month's figure came in at an anaemic 148,000, and expectations are for a reading of 163,000 for the month of January.
Anything above 180,000 should spark a fresh round of dollar buying, while a reading below 150,000 will see the dollar weakness continue. I expect to see a proper test of 89.70 levels in the Dollar Index, followed by 89 levels through the first week of February.
_______
Read more from Gaurav Kashyap:
US dollar primed for more drops after disappointing December
A tricky time for the dollar but expect a December rate hike
Dollar slips back amid mixed signals over US tax reforms
_______
Also compounding the dollar weakness are various central bank policy rate decisions due out this week. With the Federal Open Market Committee in the middle of their rate hiking cycle, markets are now turning to other global central banks who are beginning to tighten policy for their respective economies.
As this interest rate differential between US assets and global assets narrows, the demand for asset classes other than the dollar increases.
The euro, a currency which has been so smooth through the end of 2017 and beginning of 2018 seems to benefit from this, and as mentioned in previous articles, should maintain its bullish momentum through the end of the first quarter of this year.
The European Central Bank is set to convene this Thursday and is likely to adopt a more hawkish stance towards future bond purchases and future European interest rates. While we do not expect to see any change in rates until the third quarter of 2018 at the very earliest, it would be interesting to see their language with regard to their current asset purchases.
We saw the ECB cut their bond purchases by half to the current €30 billion (Dh134.8bn), a move which started this savage euro upside move – and hawkish comments this Thursday will see further upside moves in euro assets. Don't expect a low key performance from the euro through the early part of February as the upsides are expected to continue. Resistance in the Dubai Gold & Commodities Exchange euro-dollar contract remains at 1.2350 levels, a breach of which would open the door to 1.25 levels.
We are also watching the performance of the USD/CAD. The Canadian dollar had a nice rally on the back of a rate hike to 1.25 per cent from the Bank of Canada this month. We expect to see the upsides continue in the Canadian dollar with the next target at 1.2350 against the Greenback. This would be followed by a move towards 1.21 in extension through the end of the first quarter at the earliest.
And finally, DGCX’s benchmark Gold contract achieved our upside target at 1,330 levels before finding resistance at 1,344 levels. We expect rangebound movement in precious metals with a slight bullish bias, and expect support to come in at 1,310, which would represent an ideal long entry point.
Gaurav Kashyap, Market Strategist at Equiti Global Markets