Where will dollar, oil find their next moves
The Euro paused to consolidate last week having faced heavy selling pressure though the first half of June, helped by a lull in heavyhitting news flow. A barebones data docket leaves the single currency without obvious catalysts for much of next week but Friday’s inflation report may yet produce fireworks.
Baseline forecasts see the year-onyear inflation rate falling to 1.2 percent in June, the lowest yet this year. With last year’s recovery in crude oil prices now seemingly filtering out of CPI calculations, a downtick seems like a reasonable expectation. However, things may be more dire than expected.
News-flow out of the currency bloc has increasingly disappointed relative to analysts’ projections over the past two months. Price growth figures have borne out this general trend, although there have not been enough of them to truly make sweeping assumptions.
On balance, this hints that economists’ models are overstating the economy’s vigor as well as pricing power recovery potential, opening the door for a downside surprise. That is unlikely to play well with investors cautiously betting that the ECB will soon scale down the size of its monthly asset purchases again.
A soft print may go a long way toward boosting the credibility of the central bank’s decidedly dovish posture on the display in the immediate aftermath of its latest policy meeting. Indeed, President Mario Draghi may reiterate as much at the annual ECB Forum on Monday. All this bodes ill for the common unit.
The past week was expected to be all about the Government’s legislative program and Brexit, as UK Prime Minister Theresa May went to Brussels to begin the divorce proceedings between the UK and the European Union. In the event, though, interest rates were the primary driver of movements in the British Pound.
First up was Bank of England Governor Mark Carney, who sent the currency down sharply in his delayed Mansion House speech with comments that were exceptionally dovish. However, he was followed by the central bank’s Chief Economist Andy Haldane, who contradicted him in a far more hawkish address that, for the markets, was more important than the Queen’s speech outlining the government’s agenda. The result was a drop in the Pound on Carney, followed by a jump on Haldane and then a steady climb higher.
The Aussie came under more pressure against its commodity-currency peers, which probably didn’t help AUD/USD’s fortunes. Rightly or wrongly investors now see the central banks of both Canada and New Zealand as less dovish on monetary policy than the Reserve bank of Australia. New Zealand’s left interest rates alone at record lows last week, but issued a statement which markets thought was a bit more hawkish than its processor. As for Canada, well, retail sales numbers came in strongly leading investors to suspect that higher rates may not be as far off as they were.
By contrast the latest policy-meeting minutes from the Reserve Bank of Australia showed rate-setters minded to keep record-low interest rates very much where they are.
Whether this picture is strictly accurate, and whether any of these central banks are close to raising interest rates is debateable but, for the moment, beside the point. Weaker oil prices aren’t helping the broader commodity complex either and, with Australia a key raw material producer, they’ve also weighed on AUD/USD. This then is the hefty baggage which the Australian Dollar will drag into a new week which is rather short of key Australian economic news.
That said, investors know that the RBA is keenly watching the local housing market. It tells them so often they could hardly fail to. They will get a bit of light on that subject Thursday when the Housing Industry Association’s home-sales snapshot for May is released. If strong that might send AUD/USD higher, as might Friday’s look at private sector credit.
However, those two data points aside, AUD/USD will be in thrall to more-plentiful US numbers which, if they come in as expected, should keep the pair under a bit of fundamental pressure. Keep a close eye on the oil price as well as the economic numbers, but assuming no major turnaround in crude’s fortunes it’s a bearish call this week.
The correction in Crude Oil continued this week as prices entered ‘bear market’ territory, marked by a movelower of 20% or more from the 52-week high. WTI set a fresh 10-month low while Brent moveddown to a new 7-month low with prices in both markets falling below a series of key support levels in the process.
A bit of hope developed on Tuesday afternoon leading into Wednesday morning as two key gauges of Oil supply indicated contraction. The API U.S. oil inventory report on Tuesday afternoon showed a drawdown of 2.72 million barrels, almost entirely offsetting last week’s build of 2.75 million. This provided a brief amount of strength for Oil prices as we walked into the EIA report on Wednesday morning, and after a second consecutive weekly drawdown was reported, a very temporary reprieve began to show around the anxiety of a global supply glut. But also within that EIA report was a rise in U.S. Oil production of 20k barrels/day in the prior week, and this is what seemed to really grab markets’ attention as sellers took control of Oil prices shortly after the release of the report.
Normally, a weekly drawdown of 2.5 million barrels would stoke bullish demand with some follow-thru potential; but on Wednesday, that topside move was short-lived as sellers merely used the pop-higher to position in to short positions at better prices. No more than two hours that EIA report on Wednesday and Oil prices had already moved-down to set fresh 2017 lows, with WTI testing below a longterm Fibonacci level at 42.89.