Trading Notes: Oil weakness and dollar strength impacting across markets

KEY DRIVERS

  • There are several factors impacting on financial markets that are effectively a hangover from key events of last week. The underwhelming easing from the ECB, the solid Non-farm Payrolls and the chaotic lack of action from the OPEC meeting. All of these factors are playing out through euro strength, dollar strength and oil price weakness; factors that are impacting across markets. On a relatively quiet week of economic data, these factors remain key for markets.

Oil

  • The solid payrolls report has set up the forex markets for a stronger US dollar with markets strongly positioning for a Fed rate hike. Give or take the odd correction, this should help to drive a stronger dollar in front of the Federal Reserve meeting next week. The action across forex majors will continue with 3 central banks giving monetary policy updates within 24 hours of each other. The strength of the Kiwi in recent weeks and the weakness of inflation (especially as commodity prices continue to fall away) could well drive the RBNZ to cutting rates by another 25 basis points. This comes after the last cut in September but increasingly futures markets are edging towards a potential rate cut of 25 basis points to +2.5%. The wide-sweeping easing measures from the ECB never really materialised and this relieves some of the pressure on the SNB to cut its rates from -0.75%. The final major bank to update is the Bank of England which is highly unlikely to change policy stance. With this not being a “Super Thursday”, the only action could come if any further dissenting voices voted for a hike. The expectation is currently for just Ian McCafferty to vote for a hike, but at some stage (not expected to be this month) he will be joined by Martin Weale and/or Kristin Forbes (who are the most likely to shift next).
  • Commodity prices are in something of a perfect storm at the moment. China continues to slow down, the Trade data this morning continues to suggest that the demand story is slowing. However there are big problems of oversupply across the commodities complex. The OPEC meeting all but confirmed that the cartel is a waste of a calendar date. The impact of US and Russian production along with a lack of a consistent unified voice from OPEC means that there is little prospect of any ceiling to production limits and producers will continue to expand. This is a similar story in the base metals space. Subsequently, oil and base metals are being shot to pieces with equities linked to these markets being hammered.
  • Equities are struggling again. The commodities weakness is a warning signal for global demand and with the equities asset class being considered elevated risk, this will act as a drag on sentiment. The rebound in the euro (on the ECB) is a drag on Eurozone markets with the DAX and CAC both under pressure. The key and intriguing factor will now also be how equity markets react to the highly likely Fed rate hike (currently at around 80% probability).
  • This week, the data front is fairly light on tier one US releases with only the Retail Sales on Friday likely to help make up the minds of the FOMC in any real way. This is also likely to be a negative impact on the dollar, with 10 out of the 11 data points in 2015 having missed expectations.
  • Watch for: RBNZ, SNB & BoE monetary policy, US Retail Sales

markets

MARKETS

EUR/USD – The pivot at $1.0810 is a key near to medium term barometer      

  • The market is still coming to terms with the impact of the short squeeze on the euro. Has this changed the mind-set of traders? At least near term it would seem that it has. However the market is likely to regain some dollar strength in the run up to the Fed next week.
  • The old key floor is now a medium term pivot once more and I see that this will act as a barometer for the outlook. The euro was clearly too oversold in front of the ECB but the momentum is still negative medium term and this will put pressure on the pivot level. It could be that the ceiling once more comes in at the old $1.1050 pivot band.
  • Watch for: US Retail Sales

GBP/USD – Rallies still a chance to sell ahead of the Fed

  • Sterling remains under pressure with mixed UK economic data and the market moving to position itself for a Fed rate hike next week. This should ensure a bearish drift continues over the next week. The Bank of England is unlikely to give sterling bulls much to cheer, but if the US retail sales disappoint it may give a chance to sell.
  • The bears already look to be back in control and momentum indicators retain a negative configuration which would suggest continue to use intraday rallies as a chance to sell. A test of the $1.4895 low is likely.
  • Watch for: Bank of England, US Retail Sales

USD/JPY – The range to continue with the bulls to control trading  

  • The upward revision of Japanese GDP could give another chance to buy the pair as the dollar strength remains the key driver of the moves. The FOMC could now be the breakout to the upside.
  • A trading range 122.20/123.67 has continues and with bullish momentum configuration I expect an upside breakout. I prefer buying into dips as the strategy due to the positive momentum making shorts a higher risk move against the balance of the indicators. Above 123.67 opens the high at 125.28.
  • Watch for: US Retail Sales

Gold – Use the short covering rally as a chance to sell

  • The US dollar strength looks set to continue this week and this should be a driver of renewed gold weakness. The sharp rally looks to have been short covering and subsequently expect the weakness to resume in due course
  • The sharp rally failed under the key overhead resistance at $1098 and the resumption of the selling pressure is likely now with the overhead supply between $1077/$1098 likely to contain plenty of willing sellers. I expect a retest of the lows at $1045.85 in due course.
  • Watch for: The negative correlation to the US dollar to resume, US Retail Sales

Indices – The “Santa Claus rally” came early this year and the bear factors are weighing on markets once again, sell rallies.  

  • S&P 500 – With momentum indicators rolling over (a confirmed sell signal on the Stochastics) the overhead resistance 2104/2116 will encourage profit-taking. The key support is at the November low of 2019.
  • DAX Xetra – If the euro continues to hold up then the DAX will come under selling pressure again as the negative correlation trade is back in play. Corrective technical indicators are also a drag on trading too. Key support at 10,610.
  • FTSE 100 – Technically the FTSE 100 remains the worst of the major markets and the sharp selling pressure is ready to put pressure on the November low at 6080.

Calendar

WATCH OUT FOR THIS WEEK

Tuesday 8th December

  • US – JOLTS job openings

Wednesday 9th December

  • China – CPI
  • US Crude Oil Inventories
  • New Zealand – RBNZ monetary policy

Thursday 10th December

  • Switzerland – SNB monetary policy
  • UK – Trade Balance
  • UK – Bank of England monetary policy
  • US – Weekly Jobless Claims
  • US – Philly Fed Manufacturing

Friday 11th December

  • US – PPI
  • US – Retail Sales
  • US – University of Michigan Sentiment (prelim)

 

NEXT WEEK

Tuesday 15th December

  • Australia – RBA meeting minutes
  • UK – CPI
  • Eurozone – German ZEW Economic Sentiment
  • US – CPI
  • US – Empire State Manufacturing

Wednesday 16th December

  • Eurozone – Flash Manufacturing PMI
  • UK – Unemployment/Average Weekly Earnings
  • US – Building Permits/Housing Starts
  • US – Industrial Production/Capacity Utilization
  • US Crude Oil Inventories
  • US – FOMC monetary policy
  • New Zealand – GDP

Thursday 17th December

  • Eurozone – German Ifo Business Climate
  • UK – Retail  Sales
  • US – Philly Fed Manufacturing
  • US – Weekly Jobless Claims

Friday 18th December

  • Japan – BoJ monetary policy
  • Canada – CPI