Second Quarter Outlook for Dollar, Euro, Yen, Oil, Gold and Shares
A rebound in risk appetite, falter in the Dollar and push to extreme dovish monetary policy defined the close of the past quarter. What does the second quarter hold for the benchmarks of the FX, capital and commodity markets?
The US Dollar took a dangerous tumble through the first quarter, throwing into doubt the currency’s ambitions after more than four years of advance. The extreme contrast between the Greenback and its global counterparts has notably moderated over the past months and that in turn has cooled the bullish fervor for the currency.
Coming into Q1’16, our main theme for EUR/USD was that, because market participants would be wholly fixated on seeing what the European Central Bank and the Federal Reserve would do in their March meetings, neutrality would prevail.
The diverging paths for monetary policy fosters a long-term bullish outlook forUSD/JPY, but the Federal Reserve’s and the Bank of Japan’s (BoJ) wait-and-see approach may continue to drag on the exchange rate especially as Janet Yellen and Co. look to further delay their normalization cycle.
Gold embarked on an aggressive recovery in the first quarter of 2016, buoyed by a slump in Federal Reserve rate hike expectations. A dovish shift in investors’ policy bets reduces the opportunity cost to owning gold versus interest-bearing assets while boosting demand for alternative stores of value to hedge against increased inflation risk.
Oil has stayed resilient during the past few weeks, despite occasional risk-off sentiment. Crude prices rose to their highest in three months in early March, at $42.49/barrel for WTI and $42.54/barrel for Brent. This was triggered by a combination of tightening supply, a proposed production freeze and a weakerUS dollar.
As we entered the New Year, it became obvious that the lack of further Central Bank support in December threatened the fragile recoveries that have been seen around the globe in the post-Financial Collapse environment. The European Central Bank had talked up more QE leading into their December meeting, and that fell flat on December 3rd when the bank failed to increase their QE program, and instead merely cut the deposit rate into deeper negative territory.
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