Max Knudsen Chief Market Strategist at ADS Securities
Max Knudsen Chief Market Strategist at ADS Securities

Update Middle East

Q2 followed the pattern of previous years in the Middle East.  Volumes through April, May and June exceeded all expectations with flow from GCC based institutions and inward flows from Asia and Europe setting new records.  Targets which may have seemed in doubt after a lack luster Q1 were brought right back into play. 

The strength of Q2 can be attributed to a number of factors, including the move of Ramadan to July/ August for 2013 with regional traders looking to complete business ahead of the start of the Holy month.  The start of second half of 2013 coinciding with Ramadan with regional volumes reducing as expected but non-regional flows continued into the GCC with the UAE becoming a focal point for trading. 

Key FX news

The significant news in the region came from the Government of Abu Dhabi who announced the setting up of a financial free zone on Maryha Island, part of the Abu Dhabi CBD.  The laws associated with the zone, named the Abu Dhabi Global Market (ADGM), have been developed to allow Abu Dhabi to market make and set prices for FX and a range of OTC products.  When the market launches this will be the first time that a financial centre in the Middle East has become a market maker. 

In Q4 traders are focusing on the international market factors:  the gradual unwinding of Fed bond purchases and QE, together with the safe haven value of the USD are driving traders to buy USD, particularly against the Euro.  Draghi’s commitment to keep borrowing costs low, and the promise of action if money market rates climb too high has reinforce the Gulf regions view that there will be a lower EURUSD rate.  After eight months trading the Euro is little changed on the year but the pattern of trading in 2013 has been for selling interest to repeatedly cap any gains higher than 1.3400.  This is expected to continue into Q4 as prices move back to the lows of 2013 at 1.2746.

Buying interest

There is still good buying interest in USDJPY in both options and spot and this should continue, but probably at a slower pace.  Investor’s enthusiasm for the currency at levels above 100.00 has stalled for the past three months, but statistical trend models show that bullish sentiment in USDJPY is still the strongest it has been since the late 1990’s.  The model compares the percentage of higher highs and lower lows traded which are currently plus 31 per cent versus minus 14 per cent –a strong bull trend.  This reflects the underlying positive market sentiment created by unprecedented BOJ easing and an improving US economy.

However, the market is very long and investors have been positioning themselves for a sustained move through 100.00 toward 110.00 since April, when the BOJ unveiled their aggressive monetary policy.  There is a risk that if we don’t get sustained buying above 100.00 in Q4 this year then investors enthusiasm and patience may fail.