As the US dollar slips, has the Emirati dirham topped out?

As the financial markets commence trading for the second half of 2017, the question is being asked as to whether the US dollar (USD) can regain its momentum after the Greenback slipped lower against many of its counterparts throughout the first half of the year.

A mixture of concerns over US interest rate policy already being priced into the markets, controversy surrounding President Trump following the sudden dismissal of FBI Director James Comey and reduced optimism over Trump’s ability to push forward with promised legislative reforms were all seen as catalysts for the market expectations on the USD turning negative.

With this negative sentiment in mind, the question has to be asked as to whether the Emirati dirham (AED) could have possibly topped against its counterparts.

The uncertainty over President Trump’s ability to push forward with his legislative reforms is set to be an underlying tone in the atmosphere for quite some time, though it is worth pointing out that these promised reforms were already largely priced into the USD after Trump won the US elections. As a currency that is pegged to the dollar, the AED benefited from the Trump-inspired economic optimism and when the USD reached its peak near 104 at the beginning of 2017, the AED topped against its counterparts as well.

That said, the dollar is still going to fluctuate in valuation and it’s important to outline what this could mean for the AED over the second half of 2017.

EURUSD

The Euro (EUR) is still strictly undervalued, with the potential still being present for the EURUSD to conclude the year higher towards 1.20.

The absence of political risk — with Europe appearing to have fared better than both the US and UK when it comes to defeating populism — stronger economic performances, and the possibility that the European Central Bank will slowly change its tune towards a more positive one on the EU economy, combine to support the view of a stronger Euro.

When you also consider the stuttering buying sentiment for the USD, the potential is in the air for the Euro to advance higher against its trading partners. As such, EUR should strengthen against the AED.

GBPUSD

The British Pound (GBP) has managed to regain its footing against its trading partners over the first half of 2017, after suffering brutally over the final half of 2016 in the aftermath of the shock ‘Brexit’ result.

This means that the GBP has also managed to recover ground against the AED, but it is unclear how much further that advance can continue. An assortment of anxiety over a slowing UK economy, the likelihood of inflation outpacing wages leading to additional pressure on GDP output, and some unease over what will be prolonged divorce negotiations with Europe are likely to weigh on investor sentiment towards the pound.

Until the GBPUSD can technically close above 1.30 during weekly or monthly trading, the Pound has likely reached its own ceiling and this bodes well for the AED’s prospects to gain against the GBP.

USDJPY

The Japanese Yen (JPY) has once again benefited from safe-haven flows throughout the opening half of 2017, following a mixture of a sour sentiment towards the USD and geopolitical concerns dominating the overall investor landscape. This means that the AED has suffered against the Yen so far in 2017 but it is possible the tide will turn.

While the Japanese economy is improving moderately with the currency still attractive in times of market uncertainty, other developed central banks are changing their tune to be more upbeat. The Bank of Japan is not yet seen as joining the same bus. This represents a risk of changing the investor sentiment for the Yen towards weakness, and an opportunity for the AED to move higher against the JPY.

AUDUSD

The Australian Dollar (AUD) represents an unexpected contender for the dark horse currency winner thus far in the year, benefiting from its high-yielding status and the political risk element that has dominated attention in the western world.

While the Australian market will remain attractive at times due to its high-yields against other developed economies, the absence of populism risks in the western world do represent a threat to profit-taking on the Aussie. The dollar will likely attempt to recover against the AUD as we approach the second half of the year, meaning that the AED can also gain against the AUD.

What about oil?

The commodity might not have a strict trading relationship with the AED itself, but as a major oil exporter it is of relevance to the local economy. OPEC is doing what it can to stabilise the market, but it remains heavily underpinned by the oversupply dynamics elsewhere, continuously coming back to encourage sellers to enter fresh positions.

While most of the oversupply pressure will continue to be dominated by headlines around US inventories and US shale production, it’s worth keeping a close eye on the indications that both Libya and Nigeria are beginning to flood the market with their own oversupply.

Both nations were provided exemptions from the recent OPEC production cut agreement, but it was likely not factored into expectations that either oil exporter would be able to upset current efforts to achieve price stability.

Could OPEC attempt to draw Libya and Nigeria into the pact to help the cartel with the on-going efforts to improve price stability? Quite possibly, and this story might be one to watch as we progress through the summer months.

Jameel Ahmad is vice president of market research at FXTM