By FXTM Chief Market Analyst Jameel Ahmad
THE fragile USD changed the balance of power with emerging market currencies, with both the Indonesian Rupiah and Malaysian Ringgit strengthening against it.
April brought headwinds for the USD, which weakened against its main rivals mainly on the lack of buying impetus and underlying investor scepticism towards the Federal Reserve’s dovishness. The USD declined overall against the Euro, which rose to a high of 1.1446 and held above the level of 1.1226 for most of the month.
As expected, Crude Oil continued to rebound following the rise above the psychologically-critical level of $35 seen in February. OPEC’s failure to reach a deal on limiting global Oil supplies put a small dent in the recovery, but since this was also expected, Oil bulls quickly gunned through the dip to rise over $42 per barrel.
As an indicator of safe-haven buying, the Gold price went through a volatile time in April. The price fluctuated between $1225 and $1260, plummeting by $35 in the first half of the month and then rising by $30 in the second half. Caught between a weaker USD and uncertainty over the direction of global stocks, investors went through spates of risk-off, risk-on behaviour that clearly impacted the Gold price.
The GBP performed better in April after its rapid fall in March on Brexit fears. Those concerns eased off quite a bit on the back of a stronger showing in the polls for the ‘stay-in-the-EU’ camp. As of mid-month, the GBPUSD staged a tentative recovery, rising from a low of 1.4020 to a high of 1.4634.
The Indonesian Rupiah built on the strength it found in March, supported by various moves by Bank Indonesia (BI) signalling monetary easing in the months ahead. In August, BI plans to switch to a new benchmark rate of 5.5 percent instead of the previous reference rate of 6.75 percent. The intention is clearly to stimulate investment, and complement stimulus packages from the government to improve domestic sentiment. The USDIDR saw a low of 12,963.7 and a high of 13,436.3, which was a mixed result, at least when compared to the government’s expected range of 13,300-13,400.
With the commodity markets and particularly the price of oil sustaining their rebound throughout April, the Indonesian Rupiah has moved into positive momentum and is recovering and rebounding from its significant losses throughout 2015.
The rebound in the currency will also improve domestic sentiment, which is equally important. The stronger currency can encourage further purchasing power from local consumers, and consumption on the ground is needed when the economy is expected to encounter slower growth following the dramatic tumble in the price of commodities and a probable decline in trade from China leading to a reduction in GDP expectations.
The importance of the rebound in the Indonesian currency should not be underestimated, and improved purchasing power and domestic spending could be crucial towards supporting GDP growth during 2016. You can see from the active moves by the BI that, through cutting interest rates, the central bank is trying to encourage spending and lending, while the unexpected decision from the BI late in April to replace the benchmark interest rate with the 7 day repo rate as a benchmark later in 2016 also shows the desire to encourage further money supply in the economy.
The Malaysian Ringgit is gradually passing through different phases of recovery against the USD, and ranged between a low of 3.8348 and a high of 4.0360. As commodity markets improve, the MYR is taking the cue to strengthen.
After another volatile opening period for the year for the Malaysian Ringgit, volatility and rapid moves in the currency are likely to slow down slightly as we approach the middle of Q2. All in all, we have encountered a recovery in the Malaysian currency and bearing in mind that it was only a few months ago that the Ringgit was repeatedly pressured towards milestone lows near 4.40 against the USD, this is positive news and I think that many in Malaysia would have happily accepted a Ringgit valued around 3.80 in April when compared to the levels close to 4.40 less than six months ago.
What we are currently encountering when it comes to the Malaysian currency is that the Ringgit is gradually moving through progressive phases of recovery against the Dollar. This can still continue later in 2016 when you take into account that the markets have finally clued onto the fact that the Federal Reserve will not be raising interest rates as often as optimists were previously pricing into the Dollar. This does increase investor sentiment towards the emerging markets when it comes to holding capital in those economies, and we have seen that the emerging markets are looking far more attractive to investors now that the USD is looking fragile on an ongoing basis.
What would encourage the chances of the Ringgit moving past 3.80 and into new phases of its psychological recovery would be if the price of oil is able to attempt a sustained rally towards $50 – but I don’t think this is likely to happen quite yet. It is not impossible, but the price of WTI would need to close above $44 when trading for the week concludes for the potential of a return to $50 to be enhanced, and this would then be seen as another green light for those currencies linked to commodity export economies.
The weakness in the CNY slowed in April as expected, due to a combination of Federal Reserve dovishness pressuring the USD and China’s central bank interventions. The USDCNY ranged between a low of 6.4450 and a high of 6.5281 throughout the month.
The CNY has performed in line with expectations throughout April, and there are still many reasons to be optimistic that weakness in the currency is going to be far less rampant in Q2 when compared to the previous two quarters.
While the overall market headlines are going to continue concentrating on headline GDP growth in China slipping lower and some still expect the RMB weakness to continue, I think there are a couple of different factors to take into account that should encourage stability in the currency to be the theme of Q2 for the RMB.
We can see that as 2016 has commenced, the PBoC have been far less active when it comes to easing monetary policy and this can encourage stability when it comes to capital inflow/outflow in the China economy. Comments are also continuing from within China with this including members of the PBoC expressing an intention for stability in the RMB, which would in essence most likely slow down the pace of capital leaving China.
When you combine these factors with the fact that the speed of expenditure when it comes to Forex reserves from the PBoC will likely reduce as we continue to progress in Q2, you can see why overall there is reason to be optimistic when it comes to expecting stability in the RMB over the remainder of the current quarter.
OPEC’s summit in Doha drew all the headlines during April, but the real story in the currency markets for the UAE was USD weakness. A weaker USD in combination with volatile Oil prices is setting the scene for more short-term uncertainty for the UAE’s economy.
The outcome to the OPEC meeting in Doha didn’t cause any surprise in my view, and it was always ambitious to expect a production cut/freeze to be agreed at the meeting. What should provide the local markets with optimism however is that the oil markets are technically looking much more favorable, which is supporting local equity markets.
What is important to point out elsewhere however is that the USD is continuing to be traded in a fragile state, which would also suggest that the UAE Dirham is likely to slip lower against its trading partners due to the currency peg against the Dollar. US interest rate expectations could still be pushed back beyond what is already being factored into the currency markets, and this period of a correction in the USD might not be over quite yet.
This ultimately means that the Pound, Euro and Japanese Yen for instance can still trade higher against the Dollar, which in turn means that the same currencies would most probably strengthen against the Dirham as well.
Looking ahead to May, macro-economic highlights include further developments from OPEC’s continuing discussions about freezing production, and the latest US job market results. If the Non-Farm Payrolls sustain their steady growth, there’s a possibility the USD may stage a recovery as the markets move deeper into the second quarter.
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