During the month of August, the dollar advanced against most major currencies, forming a strong bullish pattern that we haven’t seen since 1997. The US Dollar Index broke above its key resistances, reaching as high as 83.97 so far. This is the highest level since July of last year. The main reason behind such strong gains is the Federal Reserve’s policy and its decision to end QE tapering in October. Another reason would be the Fed’s promise to start increasing its fund rate by 2015. US figures supported this notion as well, especially the Q2 GDP which grew by 4.2%.
Middle Eastern investors have always believed in the Federal Reserve and have always backed the US dollar as a reserve currency. With current geopolitical tensions across the globe, the region reaffirmed that the US dollar is the reserve ‘safe haven currency’ they trust. As a result we saw some notable buying exposure in the US dollar in August.
Volatility has recently picked up on most major currencies. It is particularly in favor of the US dollar, especially after the notable decline that occurred earlier this year, when investors were seduced by the higher yields from other assets such as global stocks. But after the Fed announced the upcoming increase in interest rates, investors have been gradually pulling out from stocks and are moving back to currencies. In August, the US Dollar Index saw the highest daily rate of change since January of 2013. The Euro 1-Month Volatility also rose by the highest levels since 2012. Moreover, the GBPUSD showed a notable rise in its volatility, reaching the highest level since 2011, and the rate of change has also reached a record high.
In the meantime, the Middle East is shifting its attention toward the Scottish Referendum. Recent media polls showed a recognizable change in market expectations as the for the first time the ‘yes’ vote took a lead of 51% in the poles. This was another reason for us to short GBP across the boards. However, the general consensus in the Middle East is quite positive that the final vote will be against Scottish independence. Regardless, bulls will be waiting for the “Yes” on the 19th of September. Results are expected to be announced between 06:00-07:00 AM in the UK, which is around 09:00-10:00 AM in Abu Dhabi. It is a perfect timing for Middle Eastern investors to decide on their next trades. A final vote in favor of the independence would lead to new short positions, while a vote against the independence will wake the bulls up in no time.
The Middle East will be the first region to react to this referendum because Asian markets will be approaching the closing bell at that time, and Europe would still be three to four hours away from their opening.