Black Gold

Yes, it was all about oil as we knew at the beginning of the week. The Opec meeting in Vienna sparked speculation, saw analysts evenly split on their predictions, Russian interference, Saudi hints and then finally the meeting. And the result? A huge fundamental shift.

This was a dramatic event in terms of the role the cartel has played in the past years and an acknowledgement of not only the differing needs and opinions of its diverse membership but of the new geographical map of oil production now the US has grown into one of the world’s larger contributors to global supply.

Also this week, a growingly anxious Draghi had to endure inflation numbers  and the inevitability of further pressure after the decision in Vienna.

Opec declares ‘war’ on the US shale Industry

 

The Opec news underscored the disagreement between the nations that trade under its umbrella. It seemed to surrender its role as a cartel, announcing an intention of allowing market forces to weed out the weaker producers and control prices the ‘old-fashioned’ way. So did they surrender any power? Or was it quite the opposite , a power play with the intention of squeezing the US high costs producers back out of the market.

It is a dangerous game. It could take some time to take effect and meantime it threatens its own members, notably Venezuala who are already digging deep into their reserves to support their production costs and keep the industry afloat. Nigeria has been the worst hit and of course, Iran. There is something quite unnerving about inflicting economic difficulties on an already  geopolitically unpredictable nation.

Talking of which lets not forget Russia, not a member but made it’s voice heard this week confirming that whatever Opec decided they will not cut production.

Nine Opec members are now producing under break-even conditions. Those with reserves are using them but many of them will soon be depleted. Oil is down 30% in three months and now many experts are wondering where the ‘bottom’ is.

How the Forex Fundamentals Affect You This Week

What does this all mean in general to the economy and in particular to currency values?

Cheap, and cheaper oil will have the following consequences.

1. Net Importer countries benefit. Cheap oil hurts producers helps consumers, lowering imports and production costs in non-oil based industry.
2. Cheaper Oil stimulates growth which helps global growth, but there is a problem. No 3….probably the biggest elephant in any trading room.
3. INFLATION will struggle. This means in the US rate hikes cannot take effect if inflation dips. The Fed will not move unless data supports it. In Europe , an increased risk of QE as deflation looks even more likely. Dipping inflation is not what the Japanese want either.
4. The  ‘commodity currency’ countries, such as  Canada, Australia will find growth targets difficult to maintain

A Mixed Bag Of Blessings

 

So as always a complex web of consequences.

To take our reserve currency as an example; In the US oil imports have dropped dramatically, but the growth stimulated has to be weighed against a strengthening dollar, the loss of shale producers if prices get too low and the effects of low inflation and worse, deflation abroad.

We do however trade comparatives. It is always data, policy and inflation of one economy against another. Whilst constantly watching the data barometers for clues as to the real market effect of recent events, for now the fundamental differences have not changed.

 

The Good The Bad and the Ugly  

 

Last week Draghi called for inflation ‘as fast as possible’ . This week it looks like a pipe dream and even QE, if he can manage to get the Germans on board (which might well be another pipe dream) might be too little, too late. He has this week engaged the services of a consultant.

It has not been a good week for the ECB chairman, the data on the surface met expectations, more or less, but 0.3% is not what he needs to battle deflation,

Unemployment has stuck at 11.5%

German inflation is also worrying, wiping out tentative advances since February.

The Euro’s recovery against the dollar earlier in the week again rejected the daily trend,

I think its fair to say that there is little good fundamentally in the Eurozone on which to focus. To find that you still need to look across the pond.

The Reserve Currency Comparative

In the USA, as thee weeks go by there is always a good mix, and data that missed the mark included Chicago PMI, (still up there though at 60.8) new home sales, and unemployment change. The biggie of the week for them was GDP and it beat the expectation  at 3.9%.

The USD index daily chart shows a consolidation and a gap up on friday following opec news.

It was inevitably a bad week for commodities, here is the CRB revealing another much more impressive gap down

In Australia, the Aussie dollar recently lifted by Chinese moves to assist its own economy, saw its energy sector hit. The Aussie dollar was heading down at close on Friday as this four hour chart shows;

 

Here it is in a daily perspective;

 

The Cad also suffered with both speculation and outcome in Vienna, giving back gains from the last three weeks.

How Forex Fundamentals showed in Equities and Bonds

Using Friday as the focal point and the initial reaction to the news of the week, the S&P clearly weighed by the energy sector;

The Nasdaq without energy stocks fared better;

The FTSE also fell but pared some of its losses before close;

The US 10 yr bond yields also dropped during the week …and yes another Friday gap;

Chart courtesy of Stockcharts.com

The German 10Yr bond fell to a new (and worrying low) of 0.70. Not much optimism there.

Inevitabilities and Possibilities

Not much doubt is left following Opec that pressures will increase in the struggling global economies with a focus on the Eurozone and Japan. QE starts to look more likely as an option for the ECB but the opinions are mounting that it might not work anyway and the Germans continue to oppose it.

 

In the US inflation will be challenged by the Opec decision and will not be able to raise rates without maintaining the targets. These multiple effects will have to be weighed into an already complicated policy driven market, but we are still playing a comparative game.

 

Next week brings us Non farm Friday US trade balance and a big bunch of PMI’s …keep your eye on the magic 50 level. If that is not enough an ECB press conference on Thursday and the BOC  with a rate statement on Wednesday. There is a lot of Canadian news in the coming week to watch for. Add to that mix the weekend’s digestion of last week’s drama especially since the USA was on holiday and we have an interesting week ahead and maybe a bit of a bumpy ride.

Judith Waker

fotisatradingcademy.com

Forex Fundamentals, Why You Need Them