Volatility remained high through the end of March, and several new themes were established that signalled the start of a bearish trend for the US dollar in the near term.
The dollar closed March on a weaker note as Fed-speak and stronger US data weighed down dollar bulls and improved investors’ risk appetite. The Dollar Index, a measure of the US dollar against a basket of currencies, slipped below 94.60, retracing 1.8 per cent from its March highs.
As a result, major currency pairs such as the euro and the British pound made impressive gains during March, at 4.6 per cent and 3.2 per cent, respectively. There were significant gains in emerging market currencies – the benchmark Dubai Gold and Commodities Exchange’s Indian rupee contract gained 3.7 per cent.
The bout of dollar weakness was kick-started after the most recent Fed Open Market Committee (FOMC) rate decision. As expected, rates were held between 0.25 and 0.5 per cent, and a rather dovish Fed president Janet Yellen crucially suggested that the FOMC now expects two potential rate hikes during 2016, down from the four hikes projected back in December.
Further, the Fed also toned down its US GDP forecasts, with growth expected at 2.2 per cent in 2016 and 2.1 per cent in 2017.
The dovish undertones of the FOMC spooked dollar bulls and sparked a dollar-selling surge, which had higher-yielding assets and commodities all making strong gains against the greenback.
The Brussels bombings did cause a wave of risk-off sentiment, keeping gains in higher yielding assets in check.
However, the correction was short term and the dollar reverted to weakness to close out the month.
An improving US jobs report could not stem the dollar’s weakness. March’s US non-farm payrolls improved to 215,000 from an expected 205,000 and, more crucially, February’s reading was revised upwards to 245,000. Although there was an increase in the overall unemployment rate to 5 per cent from 4.9 per cent, this was amid an increasing labour force participation rate, which grew to 63 per cent versus a previous reading of 62.9 per cent.
But perhaps the brightest spot of the report was the improvement in wage growth. Month-on-month, US average hourly earnings improved by 0.3 per cent year-on-year, versus the previous month’s pace of -0.1 per cent.
Year-on-year hourly earnings improved by 2.3 per cent, versus the previous reading of 2.2 per cent. Payroll numbers were largely in line with market expectations and the range of 2016 averages.
The Fed continues to say that inflation remains well below its target – the February core inflation came in at 1.7 per cent versus an expected 1.8 per cent. The pickup in economic activity in the US has been moderate, and the global economic situation makes the recovery sensitive.
This should continue to weigh down expectations of a rate hike at least until the end of Q3 or the early parts of Q4. This sentiment should keep the US dollar under pressure in the short term and we expect the Dollar Index to test the next support levels at 93.83, followed by 92.50.
On April 14, inflationary data will result in volatility coming back into the US dollar.
And finally, the Reserve Bank of India cut rates to 6.50 per cent as expected during its policy meeting yesterday.
The quarter-point cut was the same as what markets had been pricing in, and price action on the Dubai Gold & Commodities Exchange Toupee contract had remained volatile. The rupee was trading at 66.34 to the US dollar yesterday. Going forward, the rupee will find support at 66 to the dollar followed by 65.6, with the upside capped at 67 in the month ahead.
Gaurav Kashyap is the head of futures at AxiTrader ME.
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