Oil

Oil prices fell on worries of increased supply as Libya's two legislative bodies agreed in September to appoint jointly a central bank governor, defusing a battle for control of the country's oil revenue and potentially quickening the return to 1 million barrel per day of Libyan oil production.

Oil sentiment took a further hit after the Financial Times reported that Saudi Arabia is considering going ahead with its planned production hikes in December. The report also suggested that the OPEC producer was ready to abandon its US$100/barrel (bbl) price forecast to take back market share. Such a move would raise concerns that OPEC could pull back from the supply agreements that have helped stabilise the oil market and support prices.

Concerns that OPEC is all out to win market share are likely overdone as we do not believe a price war is in OPEC’s interests. The battle for market share is just one of degree, with OPEC likely to initiate a gradual phase-out of additional voluntary adjustments in December but could yet pause if Brent oil price sinks far below US$70/bbl.

We project Brent prices will likely be anchored around the mid-US$70/bbl in a year’s time as we expect OPEC+ to continue to play a key balancing role. Chinese announcements of new economic stimulus should help ease concerns over weak Chinese oil demand.

Precious metals

We have raised our 12-month price forecast for gold to US$2,900/ounce from US$2,700/oz. Two reasons are behind the higher gold price target.

First, the faster decline in short-term interest rates both in the West and in China is set to drive greater investment demand for gold, which is showing up in the renewed rise in gold ETF holdings since 2Q2024. The eventual magnitude of rate cuts may differ, but more Western central banks are likely to move towards rate cuts at every other meeting. The latest central bank that could soon pivot to cuts at every meeting is the European Central Bank (ECB).

Second, Emerging Markets central banks’ demand for gold is likely to remain strong amid heightened geopolitical risk and concerns over US debt sustainability. In addition to the ongoing drawn-out Russia-Ukraine conflict, tensions have risen sharply in the Middle East as the conflict between Israel and Hezbollah escalates. The US fiscal situation is unlikely to inspire a lot of confidence in the US Dollar (USD) no matter who wins the US presidential race. As the US issues more debt to finance its growing budget deficits, concerns over the USD losing its shine as the all-mighty reserve currency are likely to continue to benefit gold. Gold is money that governments cannot debase.

Currency

The US Dollar (USD) closed lower for a third consecutive month in September. The US Federal Reserve (Fed) delivered a surprise 50 basis points (bps) rate cut at its September policy meeting and its dot plot implied another 50bps in cuts for the rest of this year. Fed Chairman Jerome Powell has cautioned against assuming more 50bps rate cuts at future meetings, and he does not appear worried or panicky about the economy. With a refreshed dot plot guidance, we expect markets to shift their focus towards watching the momentum of US economic growth. If the Fed cuts rates even though the US is not in a recession, and if growth outside the US remains decent, this could disadvantage the USD. We maintain our view for the USD to trend lower as the Fed’s rate cut cycle continues. Some risks to watch include the US election outcome in November, global growth momentum and geopolitical risks. 

The Euro (EUR) traded higher in September as government bond yield differentials between the EU and US narrowed further after the Fed’s larger-than-expected 50 bps rate cut in September. Part of the EUR’s resilience can also be attributed to optimism about China’s economic recovery after Chinese policymakers unleashed a big package of support measures in late September. We maintain a neutral outlook for the EUR. Recent PMIs for the Euro-area continued to point to renewed concerns about growth, but it remains to be seen if this is a one-off summer lull or whether it represents a more material economic downturn. The latter will suggest that more ECB action is required, translating to a softer EUR. ECB’s President, Christine Lagarde, has said that the central bank is open to considering a rate cut in October if the economy suffers a major setback, although the next comprehensive set of information will only be available at the following meeting (in December). As of now, ECB officials are playing it calm as the central bank keeps its options open. The ECB is in no rush to ease versus the potential for relatively shaper Fed rate cuts, which can be supportive of further upside for the EUR - unless the Euro-area sees a negative growth shock. 

The US Dollar-Japanese Yen (JPY) cross rate traded lower for a third consecutive month in September as the Fed kickstarted its rate cut cycle, while the LDP leadership went to Shigeru Ishiba and not Sanae Takaichi (who was against the BOJ raising its rates). We continue to expect the USDJPY to trend gradually lower as the Fed cuts rates while the BOJ pursues policy normalisation amid higher services inflation and wage pressures in Japan. However, the pace of USDJPY decline may be slow as the BOJ may only adopt a gradual pace of policy normalisation. Nevertheless, further narrowing of yield differentials between US and Japanese government bonds should continue to spur further downside for the USDJPY. 

The Australian Dollar (AUD)-USD cross rate firmed for a second month in September, testing a fresh 20-month high. This came on the back of China’s latest stimulus package, somewhat hawkish Reserve Bank of Australia (RBA) rhetoric and a weaker USD. Although the RBA board did not explicitly consider a rate hike at its last meeting, RBA Governor Michele Bullock reiterated that the board does not see rate cuts in the near term. She also said that if Australia’s rates are steady while other central banks cut rates, it supports the AUD. In addition, she said that Australia’s monthly inflation data has been quite volatile and that recent data (August inflation print fell sharply to 2.7% from 3.5% in July) has not materially affected the policy outlook. We remain broadly constructive on the AUD’s medium-term outlook due to the following factors: (i) RBA keeping rates on hold for longer (the last major central banks to cut rates), given still sticky inflation, stronger consumer confidence and retail sales, and a tight labour market; (ii) the USD to trade on the back foot as the Fed’s rate cut cycle continues; (iii) the case for the Chinese economy to stabilise got some traction after China announced several support measures recently. Hopes of stabilisation in China’s economy would be a positive driver supporting the AUD. Some key downside risk factors that may affect the AUD’s outlook are (i) the extent of the offshore Renminbi’s swings (if any); (ii) the Fed under delivering with rate cuts; (iii) the global growth outlook turns sour; (iv) any market risk-off event.

In the last few months, we have seen policy makers in major markets (Japan, US and China) announcing policy moves to support growth. These moves have benefited Asian currencies. The Malaysian ringgit and Thai baht were amongst the biggest beneficiaries in the region. Further upside cannot be discounted as the Fed continues to cut rates (which could weigh on the USD) while hopes of further stimulus measures from China are mounting. Currencies that are typically sensitive to falling US rates and a stronger Renminbi are the Malaysian ringgit, Thai baht and Korean Won.