Forget about the chaotic circus that is the US presidential elections. Forget about the latest Federal Reserve meetings. Just bet on the US dollar if you haven’t already.
Even after the Fed kept its policies unchanged at its latest meeting on Wednesday, analysts said the dollar is expected to continue to strengthen throughout 2016, having already gained around 12 per cent against the sterling since the beginning of this year.
The strength in the US dollar is especially highlighted when compared to European currencies, namely the British pound, which now faces new lows after the UK voted to leave the European Union in late June.
The dollar’s potential also stands out in the current environment of low interest rates. The European Central Bank, the Bank of Japan, and Bank of England have all signalled upcoming easing policies, whereas the US Fed is still targeting an interest rate hike, with analysts speculating that hike may come in September.
“The US dollar has performed well post Brexit against a basket of currencies. For the time being, investors appear to feel that it is the better place to hold money — particularly as the world attempts to understand what Brexit means not just for the UK, but for other regions as well.
The US economy is seeing signs of growth, and given the general uncertainty surrounding economic developments in other countries, for now this sentiment will most likely continue,” said Glenn Mackersy, a dealer at ADS Securities, a financial services company.
He said he expected the dollar to strengthen further into year-end, with economic cycles favouring the US.
It won’t be smooth sailing, however, for currency markets including the dollar as volatility is likely to be high. But don’t let that deter you from going in.
Quick returns in currencies
“Currency markets can offer great opportunities for investors. Firstly, they are easy to access … The volatility the markets are currently experiencing also offer great opportunities for investors to realise quick returns and capitalise on large intraday moves.
Finally, and this is something many investors don’t typically think about, currencies can offer nice yield … Investing in certain currency pairs provides our clients with the ability to take advantage of prevailing rate differentials between two countries,” Mackersy said.
His advice? Beware of how high volatility can impact your capital, take time to map out your desired trade, and consider the various scenarios you may encounter.
Looking at other currencies, the Norwegian Krone and Swedish Krona have not performed well since the UK referendum, also supported by lower expectations for interest rates. Lower oil prices have also taken a toll on Norway, much like they did on the Canadian dollar, which has been weakening.
The fact that Brexit is likely to unfold slowly, with the UK yet to trigger Article 50, will also mean increased pressure and volatility in the UK, translating to an even weaker sterling.
According to the latest macro report from the Bank of America Merrill Lynch, the dollar will move broadly against G10 currencies during 2016, with year-end targets at 1.05 for Eurodollar and 105 for dollar-Japan Yen.
Now over a month after the Brexit vote, markets seem to have moved past that historic decision, and turned their gaze to the US labour market and global growth outlook.
In the UAE, for example, the Dubai Gold and Commodities Exchange (DGCX) recorded its highest daily trade volume of 176,645 contracts valued at $3.6 billion on July 26 as investors look to diversify their portfolios post Brexit.
Gaurang Desai, chief executive officer of DGCX, said that year-to-date volumes on British pound futures and euro futures jumped 161 per cent and 121 per cent respectively compared to the same period last year.
Flight to safety
“Brexit triggered extreme volatility across global markets, and during times like these, investors appreciate safety and security offered by regulated exchanges like DGCX to effectively manage their risks associated with rapid currency fluctuations.
DGCX has recorded an all-time high, crossing 11 million contracts as of date in current year,” Desai told Gulf News by email.
He pointed that currency trade alone accounts for over 90 per cent of the Exchange’s volumes, with an average daily value of over $1.5 billion.
“Gold and equities are the other key asset classes that draw significant trading interest after currencies. DGCX’s gold segment alone witnessed a year-to-date growth in volumes by 75 per cent over the same period last year,” he said.
DGCX lists over 40 Futures products across currencies, precious metals, base metal, equities, and hydrocarbon.
“Gold volumes on DGCX are steadily growing post Brexit which is a reflection of how gold as an asset class has historically held its value in times of uncertainty and is conferred to be a safe haven for risk-averse investors worldwide,” the CEO said.
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