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20 November 2015
The latest minutes from the US Federal Reserve have increased speculation that December will finally see it take the plunge as the first of the major central banks to bring interest rates off their near-zero floor and start tightening monetary policy. However, surprising inactivity by the US Dollar Index (US$ versus a basket of major currencies) may offer a glimmer of hope that better times lie ahead for the battered UK-listed Miners and their commodities Oil, Gold and Copper.
A US rate rise should see the USD strengthen as investors buy dollars to allow them to buy better-yielding US bonds. The USD, however, remains perched just shy of 7-month highs. This suggests that after months of the Fed frustratingly prepping us for what has become a fabled rate rise by end-2015, the hike could already be baked into the USD. So further USD gains could be very be limited. It is already suggested that among professional investors the Long USD trade is one of the most crowded out there, so how much higher can it really go? After all, if everyone’s bought USD in anticipation of a US hike, who’s left to buy USD and bid the price higher? Even the European central bank suggesting more stimulus, which would weaken the EUR and strengthen the USD in return has failed to garner much response today.
This suggests that a December Fed hike could in fact result in the USD falling back from its highs. Think of it like the reverse of a relief rally, with investors saying ‘Phew, we’ve finally had that first rate hike; no panic, any more will be small and gradual’. This may see them ditch the USD in favour of a better trade opportunity for their cash and the selling pressure push the currency back south. This is important for you as an investor why? The commodities space is all priced in USD and the currency’s recent strength has been a significant hindrance on top of slowing global demand and major supply gluts. A USD pullback may not be the answer to all the sector’s problems, however, it could be the catalyst for a very welcome rally in the Miners and commodities off their depressed lows.
Mike van Dulken, Head of Research
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research
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