- We remain highly sceptical of any meaningful agreement and would short any weakly-worded communication for a move toward the $40 floor
- Our trade: Play short oil-linked currencies such as NOK, CAD, RUB and MXN against USD as the combination of lower crude prices (lower sensitivity) and wider interest rate differentials should increase selling pressure
- Canada: Q3 GDP due today expected to indicate solid growth recovery
- New Zealand: OIS markets adjust slightly to hawkish comments from Bill English, giving NZD a boost. 2017 New Zealand growth outlook looks very positive
- Korean October industrial production dropped 1.6% y/y as labor strikes dragged auto down and political uncertainty has general negative effect
- Yesterday’s US data release: Markets likely to buy USD ahead of ADP (long USDJPY is best position to benefit) in expectation that US data will continue to come in strong
In the Asian session, headlines about the OPEC meeting today in Vienna dominated trader focus and drove asset pricing. Asian regional equity indices were mixed with the Nikkei and Hang Seng higher by 0.5% and 0.27% respectively. Yet the Shanghai Composite and ASX were lower due to weak commodity prices. Today’s OPEC meeting has generated significant volatility in the oil market this week, increasing the probability that a surprise decision will have a meaningful effect on prices. Currently, a cut in production seems unlikely given the divergent interest between members. The most recent headlines are that Iran and Iraq are against pressure from Saudi Arabia to cut oil production, making a deal for limited output difficult. However, there is a real risk that OPEC will attempt to protect its damaged reputation with some sort of announcement (most likely a further effort to manage the ongoing global supply glut). WTI has now settled in the middle of its $42-$50 range, indicating room for easy movement in either direction. We remain highly sceptical of any meaningful agreement and would short any weakly-worded communication for a move toward the $40 floor. We would also play short oil linked currencies such as NOK, CAD, RUB and MXN against the USD as the combination of lower crude prices (lower sensitivity) and wider interest rate differentials should increase selling pressure.
Broad USD strength continues following the strong US economic data released yesterday, yet currency demand has slowed marginally. Yesterday, US Q3 GDP was revised higher to 3.2% from 2.9% prior estimate. The primary rationale for the revision was solid personal consumption expenditures. Reaching a post-recession high, US consumer confidence surged to 107.1 from 100.8. Finally, US homes prices increased further as the September Case-Shiller 20-city Home Price Index rose 0.4% m/m with the annual rate of appreciation at 5.1%. However, US long-end treasury yields have not risen significantly and have already gone a long way in a short period. Without yields support, USD upside should be limited. Markets are likely to buy USD ahead of ADP (long USDJPY best position to benefit) in expectation that US data will continue to come in strong. USDJPY remains in range, but with a key support holding at 111.30, the upside extension looks plausible.
On the economic front, Canada Q3 GDP is due to be released today and is expected to indicate a solid growth recovery.
In New Zealand, Finance Minister Bill English commented that interest rates have hit the bottom and that monetary policy normalization is not a negative. The OIS markets adjusted slightly to the hawkish comments (although close to what the rates had already been pricing, giving NZD a boost). Elsewhere, the expected total cost (public & private) for the Kaikoura earthquake is estimated at $3-8bn, combined with the discussed tax break makes growth outlook from New Zealand in 2017 very positive.
In Korea, October industrial production dropped 1.6% y/y as labor strikes dragged auto down and political uncertainty continues to have a generally negative effect.