Oil

Oil fundamentals are on the right track to warrant an upgrade in our 12-month Brent forecast to US$56/barrel versus US$50/barrel previously. There is potential for higher oil prices in 2021 as travel disruptions diminish amid vaccine progress and with the OPEC+ likely to delay January’s oil-output increase.

Despite new waves of Covid-19 in the US and Europe, the medium-term oil demand outlook is turning increasingly positive amid vaccine progress that could break the link between infection and mobility. Although uncertainties remain on logistics and the roll-out timeframe, the vaccine roll-out, when it happens, should lead to normalisation of economic activity, especially in sectors that have a relatively high correlation with oil demand, such as travel, hospitality and food services. US energy demand, for example, is still principally driven by the transportation (68% according to US Energy Information Administration) and industrial (26%) sectors.

We expect OPEC+ will continue to fine-tune the duration of its pledged voluntary supply cuts with market developments. With OPEC+ likely to delay its planned January output increase, this should help limit near-term risk of oil markets tipping back into a glut.

Gold

Prospects of an imminent and effective vaccine could limit the room for extended gains in gold prices over the medium-term. Concerns that vaccine progress could slow or diminish the need for further monetary stimulus, led to higher US yields and lower gold prices. However, it is too early to throw in the towel on gold. We believe gold’s main drivers — weaker US Dollar and low real interest rates — are likely to provide support over the coming year. We think US Dollar depreciation can continue into 2021. A lower-for-longer Fed is set to keep the US Dollar as a funding currency of choice. In other words, low US interest rates makes it attractive for foreign investors to currency hedge US Dollar-denominated assets as a guard against a declining greenback.

We are also positive on gold because a lower-for-longer Fed should help limit the rise in the long-end US yields. Gold should benefit from better reflation prospects that pushes up inflation expectations and keeps real interest rates negative. We favour a buy on dip approach and expect gold prices to trend higher to US$2,100 in 6 to 12 months’ time.

Currency

The quick succession of positive vaccine developments, and the fizzling out of Trump’s challenges, allowed the market to move on from the US elections in a rather positive mood. This has been offset by rising Covid-19 cases in the US, and other more risk-positive developments, such as the delay in US fiscal support.

The market however, has been largely immune to the rising number in pandemic cases. Market sentiment has been risk-on, but not bubbling into an euphoric state. We expect this to continue into December. Questions over vaccine availability and uptake will be pushed into 2021.

Overall, this translates into a rather negative posture for the broad US Dollar (USD), as safe-haven demand continues to fall. Nevertheless, we do not see any immediate catalyst for the broad USD to fall sharply, leaving USD weakness to be more of a slow grind. This provides scope for periodic, technical-driven USD bounces, which we do not expect to negate the currency’s downside bias.

We expect the antipodeans to benefit most from USD weakness. Global risk cues and firmer commodity prices, together with the re-rating of expectations about the Reserve Bank of New Zealand, should augur well for the Australian and New Zealand currencies.

The Euro should also continue to surpass resistance levels against the USD in a largely USD-driven move. Note, however, that the macro picture in Europe is still largely anaemic and it may be difficult to justify a significantly firmer Euro.

The USD-Japanese yen cross may however stay largely range-bound, as USD weakness is offset by risk sentiment.

In Asia, we continue to back Renminbi (RMB) strength. The resilient RMB should continue to help other Asian currencies to strengthen too. In addition, a better growth outlook has also allowed portfolio inflows to return to Emerging Asia, providing further support for the local currencies. These positives are set against increasingly edgy central banks, who are concerned about its negative impact on exports. This should slow down the appreciation of Asian currencies, without necessarily denting its overall trajectory.

For the Singapore dollar (SGD), we expect it to be held within a narrow range on a basket basis. This, however, implies that there will be downward pressure on the USD/SGD, amid persistent USD weakness.