Oil

Oil prices have rebounded from what seemed to be an overreaction to OPEC’s decision to start phasing out voluntary cuts. There is good reason to think that OPEC’s supply policy will continue to keep oil prices supported. OPEC made it clear that the production increase can be paused or reversed subject to market conditions.

Brent crude prices could remain in the upper part US$80’s/barrel in 3Q2024, supported by rising summer demand on account of the US driving season. The energy markets rely on the US for a quarter of the world’s oil and gas consumption and US drivers singlehandedly account for one-third of global gasoline demand.

Oil prices could moderate in 4Q2024 as OPEC+ starts to ramp up supply in October. The gradual unwinding of the cuts then can be viewed as a potential strategy to discourage non-OPEC supply while avoiding further loss of market share to non-OPEC. We still expect Brent prices to drift to the bottom half of the US$75-90/barrel range in 12 months’ time, with the downside underpinned by geopolitical risks and the upside capped by ample OPEC+ spare capacity.

Precious metals

Gold prices retreated but steadied above US$2,300/oz after unprecedented buying by central banks drove gold prices to record levels of US$2,450/oz in May. Headlines that China’s gold reserves were unchanged in May weighed on gold prices. It is also not unusual for central banks to pause gold purchases given the sharp rally in gold prices. Our view remains that official sector gold buying is likely to continue at historically elevated levels given persistent geopolitical risks.

With central bank buying momentum temporarily fading, we think the next catalyst to push prices up likely has to come from the Fed’s pivot to rate cuts. Still, mixed comments from Fed officials could inject volatility in the short term. Cooling US macroeconomic data is increasing the prospect for the Fed to start its monetary easing by September. We hold a positive view for gold with a price target of US$2,500/oz in a year’s time.

Gold remains attractive as a US election hedge, especially against outcomes that could lead to greater debt fears, or rising inflation concerns fuelled by the risk of higher tariffs or threats to the Fed’s independence.

Currency

The US Dollar Index (DXY) traded firmer for the month of June. The Fed’s guidance for only one rate cut in 2024 keeps the higher for longer US rate narrative alive. Additionally, the recent US presidential debate served as a reminder about the two-way nature of US election risks, while Donald Trump’s better showing in the debate over Joe Biden added to USD’s market premium. Nevertheless, we continue to note that US exceptionalism has somewhat softened, versus the last few months when most data was still printing red hot. Growing strains are seen on US consumers while the tightness in the US labour market has eased. We continue to expect two rate cuts for 2024, with the first cut happening sometime in 3Q2024. For this year, we do not expect a significant decline in the USD but still expect it to trend just slightly lower as the Fed is done tightening and should embark on a rate cut cycle in due course. The scenario for a play-up of US-China trade tensions is becoming a real risk and should inject some uncertainty to markets - implying that the USD’s downward path may be bumpy, and the currency may even face intermittent upward pressure if US-China trade tensions escalate.

The Euro (EUR) was under pressure in June given the rebound in the USD, while French election uncertainty weighed on the currency too. The spread between 10-year French and German government bonds widened to +79 basis points (bps) - a level not seen since 2012 due to fiscal policy concerns under a far-right government. However, even before the announcement for French snap elections, rating agency S&P had already downgraded France’s credit rating to AA- from AA on the back of concerns that higher-than-expected deficits would push up the public debt level. For France, its debt to GDP is around 111% and deficit to GDP is at 5.5%, much higher than the average in the euro-area of about 4% and Germany’s of about 2% deficit of GDP.

The (USD-Japanese Yen) USDJPY traded higher in June and at one point, traded above 161. This was the highest level since 1986. There are expectations for the Japanese authorities to intervene. While the level of the JPY is one factor to consider, officials do focus on the pace of depreciation as the intent of intervention is to curb excessive volatility. If volatility continues to pick up or the USDJPY sees a rapid move towards 164-165, then actual intervention risk can potentially increase. In the interim, the USDJPY will look to the USD and US treasury yields for direction. For the USDJPY to turn lower, it would require the USD to change course due to Fed rate cuts or for the Bank of Japan (BOJ) to signal an intent to normalise policy urgently (either via rate hikes or by increasing the pace of balance sheet reduction). None these appears to be taking place. As the BOJ is not in a hurry to normalise and the Fed is not in a hurry to lower rates, the USDJPY carries greater upside risk for now. That said, the BOJ may hike rates at the upcoming policy meeting on 31 July. Over the medium term, we expect the USDJPY to trend gradually lower on expectations that the next move would be for the Fed to cut rates, and that the BOJ has room to further pursue policy normalisation amid higher services inflation and wage pressures in Japan. Elsewhere, the Finance Ministry has appointed Atsushi Mimura as its new Vice Finance Minister for international affairs, as the incumbent Masato Kanda retires on 31 July. Mimura will also be the new Japanese currency chief. Other new appointments include: Hirotsugu Shinkawa replacing Eiji Chatani as Vice Finance Minister while Hideki Ito will replace Teruhisa Kurita as the head of the Financial Services Agency. We will monitor to see if intervention rhetoric may change going forward.

In Asia, the widening yield due to policy rate differentials between the US and Asia remains a key driver of currency volatility and weakness in Asia ex-Japan (AXJ) currencies. According to AXJ currency positioning polls by Reuters, the market’s short positions in AXJ currencies has been on a rising trend. The shorts are highest for the Indonesian Rupiah, Philippines Peso, the Chinese currency and the Korean Won. Short positions for the Singapore Dollar (SGD) and the Indian Rupee are least amongst AXJ currencies. The softness in AXJ currencies can persist if the high for longer narrative lingers, while the weakness in the Renminbi (RMB) and JPY may also spillovers onto AXJ currencies. Looking ahead, as the Fed starts its rate cut cycle (possibly in 3Q2024), US-Asia yields can narrow, and this should be supportive of the recovery in AXJ currencies. However, the risk of US-China trade tensions may also be a hurdle to the recovery of AXJ currencies. Looking further out, trade tensions between the US and China may rise, depending on outcome of the November US elections. Trump has threatened to impose a 60% tariff on imports from China. Based on experience in the past, an escalation in US-China trade tensions can be a negative for the RMB. This may result in AXJ currencies facing downward pressure if RMB stability comes under threat. In the interim, Asian central banks will have to rely on different measures to smoothen the volatility in their respective currencies. A blow-up in the RMB may undermine AXJ currencies.

The USD-Offshore RMB (USDCNH) traded higher for the month of June as policymakers were seen relaxing controls of its daily currency-fix. The recent USDCNY fixings followed a pattern that continued to reinforce our view that authorities are pursuing a measured pace of RMB depreciation. This attempts to put an emphasis on RMB stability and yet allow for some pressure to be released on a measured basis. We believe the intent is not to pursue a big bang approach so as not to undermine sentiment (for fear of accelerating outflows). A higher USDCNY fix, a wider CNH-CNY spread and worries of escalation in US-China trade tension suggest there could be further weakening for the RMB.

The USDSGD traded higher for the month of June. Renewed pressure on the JPY and RMB and the stronger DXY were some of the catalysts undermining the SGD. The weakness may linger if these drivers remain intact. This month’s MAS policy decision will be announced no later than 31 July. The MAS core inflation rate remains sticky at 3.1% and we expect the central bank’s current policy stance to be maintained. The Singapore dollar’s nominal effective exchange rate (S$NEER) strength may linger and only fade at some point this year when core inflation in Singapore start to ease in 4Q2024.