A crude propositionBy Vincent-Frédéric Mivelaz
Oil prices dropped 5-6% Wednesday, providing a good chance for longs to reload their positions. The tumble came as OPEC (Organisation of Petroleum Exporting Countries) confirmed a decline in its demand to 32.18 million barrels/day, a drop of 760’000, and higher production from rivals. USA inventories dropped less than expected last week, while Libya and Iran are expected to reopen some closed export terminals.
The situation is well different to when OPEC met in Vienna on 22 June. Brent Crude and West Texas Intermediate were trading at $79.44 and $74.15 soon thereafter, a 4-year high. However, as tensions between both the largest oil consumers, China and the US, continue, prices are softening. We expect oil prices to benefit from a bounce in the short-term, as the worst-case scenario is now priced in.
Dollar at 6-month high versus yenBy Arnaud Masset
Markets stabilised on Thursday as trade war fears eased. The Nikkei rose 1.17%, while the Shanghai and Shenzhen Composites climbed 2.17% and 2.73%. European stocks opened higher with the Eurostoxx 50 up 0.09% and the German DAX rising 0.27%. In FX, the greenback recovered as investors fled risk: the dollar index surged to 94.78 (its highest since 3 July). Surprisingly, the Japanese yen, which usually appreciates during period of rising risk aversion, fell substantially over the last 24 hours. USD/JPY rose more 1.30% to 112.42, its highest level since 10 January. The pair is testing a key resistance level, which corresponds to the top of its multi-month downtrend channel. The surge in demand for USD/JPY suggests that investors are anxious about further yen weakness. Call prices for all maturities increased with the 1-week 25-delta risk reversal measure climbing to -0.34% from -1.28% two weeks ago.
Today traders will focus on the US June inflation report. Headline inflation is expected to have risen 2.9% annually, while the core gauge, which excludes the most volatile components such as energy and food prices, should come in at 2.3%. Stronger core inflation should nudge USD/JPY to break resistance, as it would suggest another US rate hike this year.