CURRENCY EXCHANGE: WEEK 3 (JAN 15 - 19 2024)

By Chinedu Okoye 

Thesis: Dollar's Ascendancy Amidst Global Shifts:

In the third trading week of the year, the global financial landscape witnessed a pronounced strengthening of the US Dollar, highlighted by the Dollar Index (DXY) surging to 103.03—a notable 0.86% increase. 

This elevation underscored the Dollar's ascendancy against its major counterparts, reflecting broader economic trends. However, amid this robust performance, nuanced observations emerged, particularly concerning the Russian Ruble, revealing distinctive dynamics in global currency markets.

The Dollar's ascent can be attributed to a confluence of factors, including heightened geopolitical tensions and a less dovish stance from the Federal Reserve following recent job data releases. 

This investment thesis delves into the intricate details of the Dollar's performance, scrutinizing its impact on major currencies and presenting an insightful analysis of the global economic landscape.

The subsequent sections provide an in-depth examination of specific currency pairs and their implications, offering valuable insights for investors and analysts navigating the complexities of the contemporary financial landscape.

USD v Majors:

DXY: 103.03. 

The U.S. Dollar demonstrated strength during the third trading week of the year, evidenced by the Dollar Index (DXY) rising by 0.86% to reach 103.03. This movement indicates an appreciation in the value of the greenback against its major counterparts, as delineated in Table 1 below.

However, for the Ruble, the U.S. dollar exhibited strength against the other nine currencies in the Zero Analytics watchlist. Geopolitical tensions and a less dovish Fed officials commentary following the release of job figures earlier in the month played pivotal roles in bolstering the U.S. dollar.

This risk-off sentiment is further emphasized by Gold's performance during the week, with the precious metal maintaining its position above the $2000 threshold.

    (Table 1)

EUR/USD: 1.0897. (-0.52%)

The Euro breached the key resistance level of $1.0949/€1, declining to 1.0897, marking a 0.52% drop for the pair. This establishes a bearish bias at Zero Analytics, suggesting a potential sideways trade until March, contingent on the outcome of the Federal Open Market Committee (FOMC) meeting in late January.

The less dovish tone conveyed by Federal Reserve officials provides additional impetus for the U.S. dollar against the Euro-area currency. Consequently, the EUR/USD is now in the negative territory on both a weekly and monthly basis against the Greenback.

GBP/USD:  1.2703    (-0.36%)

The Pound underwent a comparable negative shift against the dollar, declining by 0.36% to close at $1.2703/$1. Previous monthly gains were nullified, with year-to-date gains decreasing from approximately 5% to 3.99%.

Similar to Europe, the United Kingdom is susceptible to increases in energy prices and faces diminishing supplies. Oil prices have stabilized at around $78 and $73 per barrel.

   (Table 2)

USD/JPY: 148.15 (+2.24%)

The Japanese Yen experienced the most significant decline among the ten currencies analyzed, as the Greenback surged by 224 basis points to ¥148.15/$1.

The less-than-dovish tone from major Central Banks poses a significant headwind for the Japanese currency, as any further delay could impede capital inflows into Yen-denominated assets. 

Inflation stood at 4.2% in December 2023, significantly above the BOJ target. This situation has the potential to discourage private investment and diminish the relatively robust capital formation from savings.

AUD/USD: 0.6596 (-1.35%)

The Australian Dollar extended its decline against the greenback, shedding 1.35% of its value to close at 0.6596. Despite moderating inflation, the increase in commodity prices may present more negatives than positives for a resource-rich economy.

We maintain a bearish stance on the pair while not ruling out the possibility of some upward movement. An expected cut could provide a boost for the pair.

USD/CAD: 1.3431 (0.17%)

As anticipated, analysts at Zero Equilibrium project the Canadian Dollar to trail the US Dollar throughout the year. Despite the US running a goods trade deficit with Canada, it maintains a services trade surplus.

Canada stands out as the sole non-BRICS currency where the US Dollar has gained steadily and across time periods, showing an increase week-on-week (+0.17%), month-on-month (+0.67%), and year-to-date (+0.25%).

USD v BRICS:

USD/CNY: 7.1934 (0.18)

The Chinese Yuan ranked as the third-best performing currency against the greenback, experiencing a modest 0.18% decline for the week, closing at CNY7.1934/$1.

China's substantial Gold purchases during the week, contributing to its Gold reserves, led to the People's Bank of China (PBOC) increasing the supply of its currency on the market to acquire Gold, resulting in a modest fall against the greenback.

Forecasts indicate the Yuan is likely to trade sideways against the greenback throughout the year, with a modest increase anticipated following a potential Federal Reserve rate cut.

USD/INR: 83.11 (+0.29%) 

The stable Indian Rupee (INR) ranks fourth in performance against the US Dollar, experiencing a modest 0.29% rise to INR83.11/$1. This figure results in a month-on-month change of -0.01% and a 2.32% year-to-date increase.

Forex transactions (USD-INR) throughout the year have been biased in favor of the Rupee, significantly contributing to its stability, despite facing challenges in gaining acceptance for goods and services from major trading partners.

At Zero Equilibrium, we identify the USD/INR pair as intriguing to monitor throughout the year.

USD/BRL: 4.9314 (+1.54%)

The Brazilian Real depreciated against the greenback, reaching 4.9314. Despite the dollar's 1.38% monthly gain, it still faces a year-to-date decline of -3.32% against the Real.

The USD has substantial ground to recover, considering the Real has yet to eliminate all annual gains. The trajectory of this pair is highly dependent on commodity prices.

Although the Brazilian central bank cut its benchmark rates in November by 50 basis points to 12.25%, monetary policy retains a somewhat restrictive stance. Broad yield differentials to the dollar persist, reflecting forecasts for inflation in 2024 at 3.6% (35 bps above its 3.25% target for the period).

USD/ZAR: 19.0105 (+2.12%)

The US Dollar surged by 2.12% against the Rand in the week, marking the South African currency as the poorest performer among the BRICS nations. It stands as the second-worst performing currency against the greenback, following the Yen.

The currency's outlook appears grim, with the South African economy projected to grow by only 1.5% in 2024. Our stance is notably bearish, and we maintain a short position on the Rand against the greenback.

USD/RUB: 88.200 (-0.24%)

The Russian Ruble has sustained its appreciation against the greenback, standing out as the sole currency in review to register gains for the week. This upward trajectory is underpinned by the ongoing process of de-dollarization within the Russian economy and a consistent demand from major Asian importers of Russian Crude.

Despite the recent positive momentum, it's noteworthy that the Ruble holds the position of the worst-performing currency on a year-to-date basis. There remains a considerable journey ahead for recovery, and the Ruble's performance may be significantly influenced by the Federal Reserve's potential decision to cut rates in March.

Assessing Dollar Strength and Trade Recommendations

The third trading week of the year witnessed a robust performance for the US Dollar, with the Dollar Index (DXY) rising to 103.03. This surge was fueled by geopolitical tensions and a less dovisy Fed stance following job data. Gold however stayed resilient above $2000 reinforcing a risk-off sentiment.

Trade Recommendations:

1. EUR/USD: A bearish bias is noted with a breach of key resistance. Zero Analytics suggests monitoring for a potential sideways trade until March, influenced by the FOMC meeting late January.

2. GBP/USD: The Pound's negative move against the Dollar prompts caution. Geopolitical factors and energy price increases in the UK add to the uncertainty.

3. USD/JPY: A significant rise against the Japanese Yen is observed, influenced by less dovish central bank tones. Inflation concerns and potential delays pose challenges for the Yen.

4. AUD/USD: Despite a fall in the Aussie Dollar, Zero Analytics remains bearish but anticipates some upward movement. An expected rate cut could provide a boost.

5. USD/CAD: The Canadian Dollar is expected to trail the US Dollar throughout the year. Analysts foresee a sustained trend, considering the US trade surplus in services.

BRICS Currency Pairs:

6. USD/CNY: The Chinese Yuan is expected to trade sideways against the Dollar. Gold purchases by China contribute to a modest fall in the Yuan.

7. USD/INR: The Indian Rupee remains stable against the Dollar, with Forex transactions favoring the Rupee. Zero Equilibrium suggests monitoring this pair for intriguing developments.

8. USD/BRL: The Real's drop against the Dollar presents challenges, influenced by Brazil's monetary policy and inflation forecasts. Commodity prices play a crucial role in this pair.

9. USD/ZAR: The South African Rand is the worst-performing BRICS currency. A bleak economic outlook and an anticipated growth of 1.5% in 2024 contribute to a bearish stance.

10. USD/RUB: The Russian Ruble gains against the Dollar due to de-dollarization and stable demand from Asian importers. Despite recording gains, the Ruble remains the worst performer year-to-date.

Note: Traders should stay vigilant for potential market shifts based on geopolitical events, central bank decisions, and economic indicators.