Oil

Crude oil prices fell after OPEC laid out plans to remove the voluntary cuts earlier-than-expected even as the OPEC+ alliance warned that it could change its supply policy if market developments warrant it.

OPEC agreed to extend its voluntary cuts of roughly 2mn barrel per day (b/d) through to 3Q2024, before gradually phasing them out over the following 12 months. Separately, the group will cap output at about 39mn b/d through to 2025. The former outcome falls short of market consensus that the voluntary cuts will be extended until year-end. Discussions on production baselines were also pushed back from November 2024 to November 2025, but the UAE will be allowed to add 0.3mn b/d to its production.

Overall, the deal manages to preserve cohesion in the OPEC+ group, as Saudi Arabia needs to balance the need for a high oil price (of at least US$80 per barrel) with other countries’ wanting increase output, notably the UAE and Kazakhstan. The gradual unwind of the cuts can be also viewed as a potential strategy to discourage non-OPEC supply while avoiding further loss of market share to non-OPEC players.

We lower the 12-month Brent oil forecast to US$75 per barrel from US$80 per barrel previously given the phasing out of extra voluntary cuts.

Precious metals

Silver is often viewed as a derivative of gold. As an expression of a catch-up trade to gold, the recent surge in silver prices has not just validated but also surpassed our view. The gold-silver ratio has fallen sharply through 80 to the lowest levels since late 2022/early 2023. The recent sharp silver rally makes us more cautious about the risk of pullbacks.

Silver has found interest from investors who have been missing the move in gold as well as those looking for a higher beta trade. It is helpful to remember that silver is much more speculative. Being more retail-driven, silver prices can experience larger short-term moves in both directions compared to gold’s steadier characteristics due to central bank/institutional support. The fundamental picture of improving industrial demand (notably in photovoltaic and electronics) and scope for higher gold prices remains supportive of silver outlook. We lift the 12-month silver target to US$32.90 per ounce from US$30.90 per ounce previously.

Gold has fallen from the latest all-time high of US$2,450 per ounce on 20 May on concerns that the Fed may delay lowering rates. Some consolidation would be healthy after the recent price jump. Gold could enjoy further tailwinds once the Fed easing cycle gets going, likely in September. Geopolitical risks and uncertainties from the upcoming US elections remain compelling reasons to have an allocation to gold as a portfolio diversifier.

Currency

The US Dollar (USD) Index (DXY) weakened in May due to softer US economic data. Nevertheless, the currency’s decline had limitations as it retains a carry advantage, and Federal Reserve rhetoric remained hawkish. Nonetheless, US exceptionalism has somewhat softened (versus April when most US data was still printing red hot) while growth and activity in other parts of the world, including Korea, Taiwan, Malaysia, Philippines, Germany, and France are starting to show signs of stabilisation. Given a slight shift in the global growth dynamics, and skewed market pricing for fewer Fed cuts, the risk-reward may favour selling the USD on rallies.

The immediate risk is persistent US inflation and higher-for-longer rates which could result in USD strength lingering on in the coming weeks. For the year, we still expect the USD to trend slightly lower towards the year-end as the Fed is done tightening and should embark on rate cut cycle in due course. Further USD weakness would require the blessings of weaker US data, in particular price/wage-related ones, and or for the Fed’s rhetoric to turn less hawkish.

The other risk we are mindful of is the US elections in mid-November. The scenario for a play-up of US-China trade tensions cannot be ruled out and this may inject some uncertainty into the markets, thereby implying that the downward path of the USD may be bumpy and may even face intermittent upward pressure if geopolitical tensions rise.

The Euro (EUR) closed higher for May, as activity data continues to surprise to the upside. In the Euro-area, 1Q2024 GDP came in higher-than-expected. Recent preliminary manufacturing PMI for the Euro-area and services PMI for Germany rose to more than one-year highs, while ZEW survey expectation rose to a two-year high. Even wage growth picked up in 1Q2024. The better-than-expected negotiated wage growth data for 1Q2024 is not likely to affect the ECB’s decision on the timing of its first rate-cut in June but adds uncertainty to the ECB’s rate cut trajectory beyond June.

ECB Chief Economist Philip Lane has said that the ECB is ready to cut rates in June, but policy must continue to be restrictive this year as wage growth will not normalise until 2026. Bundesbank President Joachim Nagel said that the ECB should probably wait until September for any subsequent cuts if there is a rate cut in June, reiterating his caution against easing too quickly. Spanish central bank governor, Pablo Hernandez de Cos, is also looking for a first cut in June, but cautioned beyond that, while ECB board member Isabel Schnabel echoed similar concerns – she warned against lowering borrowing cost too quickly. Growth conditions in the Euro-area are slowly stabilising and the growth re-rating story may not have been adequately priced into EUR. A better growth story in the Euro-area and a market re-pricing for fewer ECB rate cuts should be supportive of the EUR’s upward trajectory.

The British Pound (GBP) was firmer in May. A hotter-than-expected CPI print has pushed out market timing for the first rate cut to November and even reduced the magnitude of cuts for this year. UK PM Rishi Sunak’s unexpected call for early election on July 4, and higher inflation prints has somewhat cemented the view that the BOE may not be willing to cut rates during an election campaign. The GBP’s reaction to the UK elections has been muted, despite PM Sunak and the ruling conservative party trailing well behind the Labour party and its leader Keir Starmer. We caution that volatility may pick up as we get closer to the election campaign, and this may then pose two-way risks for the GBP. Medium term, our bias remains for a mild upward trajectory for the GBP as the BOE may keep rates restrictive for a little longer as inflationary pressures remain (services inflation stands at over 6%) and economic growth in the UK is proving resilient. Manufacturing PMI data has also swung into expansionary territory at 51.3 in May, which was the highest level in almost two years.

The USD-Japanese Yen (USDJPY) cross rate continued to trade near recent highs in May, tracking the move higher in US Treasury (UST) yields. The Japanese Finance Ministry reported that Japan spent a record JPY9.8tn (US$62.2bn) from 26 Apr to 29 May 2024, to defend the Yen (JPY). This amount exceeded the total amount of JPY9.2tn used in 2022 and JPY9.1tn used in 2011 to defend the Yen. The scale of intervention demonstrated Japan’s readiness to defend the JPY, but officials cannot be burning resources repeatedly. Intervention is an option to slow the pace of depreciation but not a tool to reverse the trend. Hence, for the USDJPY to turn lower more meaningfully, it would require the greenback to weaken or for the BOJ to signal its intent to normalise urgently (either via rate hikes or an increase in the pace of balance sheet reduction). Near term risks for the USDJPY are two-way considering Fed and BOJ meetings in June. Inflation has also been on target and wage negotiations for 2024 reported an average wage growth at 5.17% - much higher than previous years.

The Australian Dollar (AUD) and USD cross rate (AUDUSD) traded higher in May. A broad USD pullback, an upswing in copper prices and an uptick in inflation data were some of the drivers underpinning the AUD’s rise. The RBA minutes, released recently, also noted that inflation risks has risen somewhat and there are risks that the inflation rate may stay above target for longer. The RBA also said that returning the inflation rate to target remains the highest priority. Outside of Australia, China’s recent measures to support its real estate markets have also boosted sentiment towards the AUD. We remain broadly constructive on the AUD’s outlook for the following reasons: (i) the possibility that the RBA may hold rates higher-for-longer (possibly being one of the last major central banks to cut rates), given still sticky inflation, the stronger consumer confidence an retail sales, and the tight labour market; (ii) the USD could trending slightly lower towards year-end as the Fed is done tightening and should embark on a rate cut cycle soon; (iii) higher commodity prices (iv) the potential case for a China stabilisation story as China is adopting a more targeted approach towards its real estate sector. Some key downside risk factors that may affect the AUD’s outlook are: (i) swings in the Chinese currency; (ii) the possibility that the Fed may keep its restrictive policy for a longer-than-expected period; (iii) uncertainty about the global growth outlook; (iv) market risk-off events (e.g. potential escalation in US-China trade tension, escalation in Israel-Hamas conflict, Red Sea developments).

There were several positive government measures coming out of China in May to support the economy and beleaguered property market, including the 300bn Renminbi (RMB) in funding to help clear excess housing inventory and convert them into affordable housing, while also relaxing downpayment and mortgage rules. This is a good start. China’s CSI 300 real estate index was up nearly 30% at one point in May but currency markets have yet to react positively. There is still some scepticism if such measures will repair sentiment/confidence and if it will bring back demand. Some details are still missing over the source of funding and if the 300bn RMB may be sufficient. Currency markets may prefer to see more progress in the real estate sector and a pick-up in economic growth before pricing in optimism. Elsewhere for the USDRMB, the wide UST-CGB (Chinese Government Bonds) yield differential is also another factor underpinning the rise in the USDRMB. Markets continue to expect rates and yields in China to go lower while the Fed not in a hurry to cut rates – which keeps the USD supported. Overall, USDCNH (offshore RMB) may continue to see two-way risks in the short term.

The USD-Singapore Dollar (SGD) cross rate (USDSGD) traded lower for the month of May. The Singapore Dollar nominal effective exchange rate (S$NEER) has strengthened slightly above our model implied mid-rate. We continue to expect it to trade in the upper half of its band as MAS’s policy stance (appreciation stance) as core inflation remains well above the historical target. The next monetary policy decision by the MAS is sometime in second half of July. The window to ease monetary policy is open for the second half of this year, but any decision will be data dependent. If core inflation shows signs of subsiding earlier or more materially than anticipated, then policy could be eased in July or October. But at this point, our base case is still for the MAS to remain on extended hold, unless there are changes in expectations about the inflation-growth dynamics. Looking out into the horizon, we expect a milder downward trajectory for USDSGD, premised on our view for the Fed to lower rates in due course and on expectations that China’s economy may find some stabilisation.