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Investors favour short USD post rate rise


ETF Securities’ last report of the year reveals that after a 1 per cent rally in the US Dollar, investors bet against the currency.

ETF Securities’ last report of the year reveals that after a 1 per cent rally in the US Dollar, investors bet against the currency.

ETF Securities writes that US Federal Reserve (Fed) governors surprised the market last week by increasing their expectations of rate hikes next year to three from two previously in their so-called ‘dot plots’. Their first rate increase in a year was well anticipated however, the firm says.

“The European Central Bank (ECB), on the other hand, continues to diverge with the Fed, extending its bond-buying program to December 2017 and reducing the amount to buy per month from EUR80 billion to EUR60 billion from April next year.

“The surprising change in the Fed’s dot plot and policy divergence between the central banks sent the US dollar 1 per cent higher against the Euro and 0.7 per cent higher against the Sterling last week. ETP investors appear to think the move is overdone and placed USD99 million into short USD, long EUR ETPs and sold USD10 million out of long USD, short EUR ETPs.

“We expect 2017 to benefit both cyclical and alternative assets. Investors have been piling into industrial metals ETPs, adding USD246 million inflows since February 2016 while robotics and cybersecurity ETPs recorded USD127 million and USD47 million inflows respectively this year. 2017 will likely see a large rotation in investors’ portfolio allocation as US and EU monetary policies diverge further, US treasury yields surge, while a strong US dollar weighs on gold despite the populist threat underpinning demand for the haven asset. We see cyclical assets such as base metals or alternative assets as the next year’s winners (albeit after a short-term correction), “ the firm writes.

Profit taking from oil ETPs continue as oil remains nears six-month high, the firm says. “As mentioned in our blog, The mirage of deep oil production cuts, we believe market’s optimism following the OPEC meeting at the end of November is overdone. After rising 5.3 per cent on average earlier this month following the meeting, oil prices jumped above the upper end of our range (USD55/bbl.) in the wake of Saudi Arabia’s announcement earlier last week about potentially cutting production further. While non-OPEC countries have also reduced production, we believe oil prices will pull back as investors acknowledge the gap between the OPEC’s promises and the numbers that will be published in the next oil report. The likelihood for US tight oil to turn on the tap again will add further pressure to oil prices.

Gold is close to ending the year where it started, ETF Securities writes. “Gold ETPs saw USD76.8 million of outflows as its price slipped further. With the Fed unwilling to let inflation rise further, the yellow metal tumbled 2.7 per cent last week and is likely to see further downward pressure next year as the Fed implements a more aggressive rate policy which lead to US dollar appreciation. While political uncertainty remains elevated in Europe with the Brexit
and the upcoming elections in the Netherlands, France and Germany, we believe the USD will continue to be a heavier driver of the gold price,” the firm concludes.

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