- We believe that the crude oil rally is running out of steam and that we should soon see another correction
- USD may lose further grip ahead of tomorrow’s Jackson Hole meeting
- The muted response from the treasury market suggests that investors still doubt the Fed will be able to push the button before the end of the year
- EUR/USD is slowing heading towards the next support, standing at 1.1231, while on the upside a resistance lies 1.1366
- USD/JPY: We are clearly bearish as from our point of view, the BoJ will lose any gains from the abenomics era. A target of yen 90 for one single dollar note within the medium-term is likely
After a sharp drop on Wednesday, crude oil prices consolidated during the Asian session, with the West Texas Intermediate trading sideways at around $46.80 a barrel, while the international gauge, the Brent crude, was trading at around $49 a barrel. The sell-off in crude oil prices came on the heels of an unexpected increase in US stockpiles. Indeed US crude oil inventories increased by 2.5mio barrels in the week ending August 19, widely beating median forecasts of a reduction of 0.85mio after contracting 2.5mio in the previous week. After decreasing consistently from May to June, given a solid boost to prices, inventories are increasing again together with rig count, which is up more than 25% over the last three months. We therefore believe that the rally in crude oil prices is running out of steam and that we should see another correction.
It was a relatively quiet session in the FX market with most G10 currencies appreciating slightly against the greenback. Indeed, the US dollar retreated somehow on Thursday, ahead of Janet Yellen’s speech on Friday at Jackson Hole. Yellen is expected to provide better insight regarding the scale and timing of the normalization process initiated last December, especially after several Fed members, including Vice Chair Stanley Fischer, dropped some hawkish comments during press conferences. The muted response from the treasury market suggests that investors still doubt that the Fed will be able to push the button before the end of the year. After sliding 0.40% yesterday, EUR/USD edged up 0.05% to 1.1270 in Tokyo. The most traded currency pair is slowing heading towards the next support that stands at 1.1231 (Fibonacci 61.8% on June debasement), while on the upside a resistance lies at 1.1366 (high from August 18).
The Australian dollar was the best performing currency amongst the G10 complex. The Aussie rose 0.20% against the greenback as crude oil prices stabilised. The Norwegian krone and the New Zealand dollar were also better bid as commodities were trading slightly higher. AUD/USD tested the 0.7639 level in Sydney before easing slightly to 0.7625. USD/NOK edged down to 8.2040, while NZD/USD tumbled once again on the 0.7335-0.7350 resistance area and returned to around 0.73. Trading volumes should remain weak in the FX market ahead of Yellen’s speech; however, emerging market currencies are expected to be more volatile.
Yann Quelenn, market analyst: “Central bank credibility at stake: Should we really expect something big to come from tomorrow’s Jackson Hole Policy Symposium? The Fed will, as usual, provide hawkish comments and hints that “a possible rate hike” before year-end is possible. Of course this will never happen, which is why investors are now very suspicious of the Fed and the normalization of interest rates. The major issue is that the US central bank needs inflation to kill its massive debt, currently above $18 trillion, before raising rates as well as a strong labour market. But, our view is that US economic health is overestimated. Indeed, unemployment tax receipts, aimed at funding the state workforce agencies by companies, have fallen over the past 4 years. This contradicts the notion that the US economy is actually creating jobs.
In Europe, the ECB is conducting a very aggressive monetary policy, spending at the pace of around €1 trillion per year to stimulate the economy when recent data came in at a decent level. Inflation has risen 0.4% in the last four months and PMI is still above 50 (signalling expansion) for August. The ECB is all-in while according to data, the Eurozone economy is not in a recession.
Looking to Japan, it is hard to see how things can end well for the BoJ. The central bank is now a major shareholder for one third of all companies trading on Japan’s major index, the Nikkei 225. On top of that, according to data, Japan is not even in a recession cycle but its monetary policy is simply huge and markets have already started to price an increase in the annual bond-purchase target from yen 80t to 90t. On the USD/JPY, we are clearly bearish as from our point of view, the BoJ will lose all the gains it had during the era of abenomics. A target of yen 90 for one single dollar note within the medium-term is likely.” —
Today traders will be watching manufacturing confidence from France; retail sales from Denmark; PPI and GDP from Spain; unemployment rate and PPI from Sweden; IFO from Germany; initial jobless claims, durable goods orders, services and composite PMIs from the US.