It was not a very optimistic start to the month for equities markets, after the Nikkei’s 3% plunge on the first trading day in May.

The rest of the Asian markets generally closed lower after resuming trading following Labour Day, except for Australia and China.

The ASX 200 index surged 2.1% as the Reserve Bank of Australia (RBA) cut rates by 25bps to a record low of 1.75% on Tuesday. The Shanghai Composite closed 1.85% higher, as the market viewed the official PMI data positively. A stronger yen will probably continue to blacken the outlook for Japanese equity markets, which will resume trading this Friday.

FX volatility
Increasing FX volatility resulting from central bank policies is transmitting waves of uncertainty through global markets. That raised the question that many investors have on their minds: will 'sell in May' happen this year? Over the last six years since the global financial crisis, the MSCI emerging market index has registered five years of negative monthly returns in the month of May.

Although we understand that past performance may not always predict what is going to happen in the future, when market participants pull themselves out in order to avoid this 'phenomenon', it could become a notable selling force. This is especially worrisome as we’ve just experienced two months of rebounds in commodities and equities, since mid-February. For the long-term investors, however, short-term volatility may not affect their positions if the fundamentals remain intact.

FX
The Dollar Index rebounded sharply to 93.00 after falling for the sixth consecutive day and testing the recent low of 92.00 last night. Almost all of its peers have strengthened against USD recently.

The biggest component of the dollar index, the euro, surged to an eight-month high of 1.1590 per dollar before coming down to 1.1500 this morning. USD/JPY reached the 18-month low of 105.50 yesterday. GBP/USD refreshed its year-to-date high at 1.4760 before it came down to 1.4540 this morning. USD has fallen 6% year to date, and reached its lowest levels since January 2015.

The recent move is probably due to a number of reasons: the market is unwinding the expectation built on Fed rate hikes through 2014-2015, during which the dollar index has rallied almost 25%, from 80.00 to near 100.00. High expectations had been priced in before the Fed began to tighten monetary policy. And right now, the dollar is attempting to mean-revert to a lower level as the Fed’s dovish tone starts to melt those expectations. The BOJ’s 'no action' decision last week has also fuelled a weaker dollar.

Commodities
A stronger US dollar weights on commodities. Gold retraced to $1,286 this morning from its 15-month high of $1,300. Crude oil prices dropped for a second day as the market awaits the DoE weekly crude inventory tonight to find clues as to the supply-demand balance. Rising Iranian crude production has also added to the concern of oversupply as recent data shows daily output has surged to 3.5 million barrels.

US Dollar Index June 2016

Key technical levels to watch:

  • Immediate support levels: 92.00, followed by 90.00
  • Immediate resistance level: 94.00
  • 33% RSI shows short-term oversold

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