- US oil supplies: Very unlikely that we will see a reversal in the current demand/supply imbalance after a third straight week of US stockpile increases and a rising rig count
- NZ: Wheeler states that the RBNZ has “very limited influence over the exchange rate”, openly admitting that it cannot compete in the global currency war
- Gold continues trading within its uptrend channel, supported by the strong demand for safe haven assets, struggling to break the 1,380 resistance
- RUB is following its upside momentum trading below 65 ruble for a single dollar note
- Today, Russian gold and FX reserves will be released and should show a continued increase towards the central bank's $500m target. This strategy is definitely helping Russia to attract investors.
- Russian central bank will ease again at its September monetary policy meeting and we expect a cut towards 10%.
Crude oil prices had some respite last week as the West Texas Intermediate rose 11% from $39.20 to $43.50 a barrel. Immediately certain market participants turned bullish and predicted that the black gold would quickly return towards the $50 threshold, neglecting to take into account the weak global environment and mounting concerns about a supply glut. Released on Wednesday, US inventory data surprised to the upside and increased by 1.05mn barrel to 523.6mn, while market participants were expecting a reduction of 1.5mn barrels. This is the third straight week of increases in US stockpiles and with the rising number of rig count in the US, it is very unlikely that we will see a reversal in the current demand/supply imbalance. There are some rumours about a possible agreement among OPEC members in Algeria in September, which could in theory limit supply to boost prices. Meanwhile, the WTI resumed its debasement and fell more than 4% from yesterday’s high. A strong support can be found at $40.52 (200dma), while on the upside a resistance lies at $43.52.
The New Zealand dollar was the best performer among the G10 complex as it rose 0.67% against the US dollar in overnight trading. NZD/USD tested 0.7341 in spite of the RBNZ’s decision to cut its official cash rate by 25bps to a record low 2%. As I wrote yesterday, the market was expecting a strong signal from Governor Wheeler, not just a rate cut. The statement and press conference were clearly not dovish enough, while the market expected the RBNZ to leave the door wide open for another rate cuts. Instead, Governor Wheeler admitted that the Reserve Bank of New Zealand has “very limited influence over the exchange rate”, basically stating outright that it is incapable of competing in the global currency war. NZD/USD failed to break the 0.7325 resistance (high from July 12th) to the upside and is currently trading at around 0.7260.
Yann Quelenn, market analyst: Russia: Heading towards another rate cut in September: "The ruble is following its upside momentum, currently trading below 65 ruble for a single dollar note. Things are looking up for the country as its economic prospects show definite signs of improvement. July's inflation data plunged to its lowest level in 2 years - to 7.2% y/y for July. It would appear that Elvira Nabiullina's monetary policy strategy is paying off. Moreover, the head of the Russian Central Bank has made clear that one of her primary objectives is to increase gold and FX reserves up to $500 million in an effort to back its currency in gold as much as possible. This would appear to be a smart move considering the current context of global uncertainty and the strategy is definitely helping Russia to attract investors. Today, Russian gold and FX Reserves will be released which should show a continued increase towards the central bank’s target.
For the time being, the ruble is appreciating and this overall increase needs to be monitored. For this reason we believe that it is likely that the Russian central bank will ease again at its September monetary policy meeting. The last rate cut happened in June when rates were lowered to 10.50% from 11%. We now expect a cut towards 10%.” ---
Peter Rosenstreich, head of market strategy: Mexico’s central bank, cautious but on hold: At today’s monetary policy meeting, Banxico is widely expected to keep its policy rate unchanged at 4.50% following the 50bp hike in June and 125bp total in the current tightening cycle. Despite a slight deceleration in inflation, as annual CPI rose to 2.64% below 2.73% expected, the divergence between inflation and growth dynamics remains an issue for the central bank. However, Banxico remains vigilant as MXN steady deprecation risks breaching the bank’s inflation target and triggering financial instability. On the growth side, industrial product, released today should remain restrained, at 0.5% from 0.4% y/y highlighting growth uncertainties emulating from the US. However, Banxico is primarily focused on the Fed and defending the MXN from excessive depreciation. The central bank indicated a reactive strategy, shadowing the FOMC policy decision. Should the Fed raise rates by 25bp in September we anticipate Banxico will respond-in-kind (FOMC 21st & Banxico 29th Sept). Yet with a preemptive 100bp tightening head-start, Mexico is currently ahead of the curve so we do not anticipate any intra-meeting action (so long as MXN weakness remains measured). That said, our current base scenario is for no Fed hike in the fall, keeping Mexico on the sidelines.
Reaffirmation that global central banks will remain dovish for the foreseeable future, with the obvious exception of the Fed, has supported broad-based risk and yield seeking. Investors have piled into EM FX with MXN the clear outperformer in recent days, despite the peso generally lagging in the indiscriminate risk rally. In EM FX, MXN has been one of the worst performing currencies of the year-to-date, due to its high correlation to oil, uncertainty over US growth and the political backdrop (decline of Republican presidential candidate Trump in the polls has been viewed as a positive for Mexico) and the general preference of investors to demonstrate a negative EM strategy through the peso (low cost of carry). In the current risk-taking environment we should see MXN gain marginally against the USD, but lag behind LATAM peers.” ---
Overall it was a quiet FX session in Asia as most currency pairs treaded water. Precious metals continued sliding lower with gold falling 0.32%, while silver was off 0.48%. After falling 0.40% in the US and European session yesterday, the yellow metal dropped another 0.30% in Tokyo, down to $1,342.65 an ounce. Gold kept trading within its uptrend channel supported by the strong demand for safe haven assets. For now, gold has been struggling to break the 1,380 resistance (previous highs); however, the technical structure does not indicate a reversal yet.
Today traders will be watching current account balances from Turkey; CPI from Sweden and Italy; manufacturing production from South Africa; initial jobless claims, import price index and continuing claims from the US.