Oil under spotlight again
Oil traders started getting itchy feet and nervous trigger fingers when WTI approached the $44.50 levels. The closer the market moves to $45.00 the more likelihood that US shale producers will ramp up production, adding to the supply equation. Also, prices were already reeling when Genscape data hit the market indicating a build of more than 840,000 barrels of U.S. crude in the four days to April 19. Sentiment continued to sour after the unexpected headline.
However, I don’t think the oil patch sentiment has shifted fundamentally, and price action is still very constructive. From where I sit, the latest move looks primarily driven by profit-taking as the market approached the 45.00 dollar level. However, dealers will be glued to the news wires watching the ever-changing oil supply headlines. There are lots of conflicting headlines with reports that some OPEC members were calling for supply freezes in June while other looking to ramp up production. The oil story could dominate headlines for the rest of 2016.
Commodities on the rise
On the broader landscape, commodities are enjoying a recovery so far this year, after five years of steady decline. Oil has hit its highest level in five months; gold is up some 20% this year while the majority of other commodities (iron ore, soya beans, etc.) are enjoying a resurgence. All of which underscores improving risk sentiment and a huge positive for commodity currencies.
Safe-haven flows overnight on the oil capitulation sent USDJPY lower but remained firmly supported above the key 109.00 level. I expect oil market gyrations will continue to drive sentiment for today’s session.
Looking toward next week, it's conceivable a side-lined BoJ would see the USDJPY trade at 108. However, given the very positive risk-on tone in the market coupled with an inactive Fed likely stoking the risk sentiment fires, it more likely we see a continuation of range trade between 108 and 110.
Of course, the BoJ can still surprise, but it will probably sit tight for another month to see how much support USDJPY gets from recovering risk appetite. US equities should continue to benefit from the dovish Fed, and the current risk rally could have extended well into 2016. I suspect the BoJ will hold off firing the much talked about third salvo, namely the combination of JPY 1 trillion increase of monthly JGB purchase and JPY 2 trillion increase of annual ETF purchases, which will bring the size of the asset purchases close to highly significant JPY 100trillion mark.
Headlines from the State Administration for Foreign Exchange (SAFE) indicate that progress continues and a push is on to open and transparent domestic forex market is ongoing. The end goal is the promotion of a unified RMB, reiterating their long-standing plans. Also, spokesperson Wang Chunying stated that China would be able to cope with the impact from the U.S. Federal Reserve's rate-hiking policy normalisation when it happens. However with the Fed unlikely to rock the boat anytime soon I would expect the Yuan to continue trading very stable to its linked basket of currencies through the better part of 2016.
Look for broader USD moves to dictate play today as Fed rates decision is the main focus now, not that the Feds are expected to move next week but more so for the forward guidance in the accompanying policy statement. PBoC sets the official rate at 6.4898 vs. 6.4803 in line with a firmer USD overnight.
Broader USD strength and lower oil prices coupled with weaker risk sentiment are weighing on the regional basket. Add in a minor shift in traders’ sentiment where some now view June’s Fed meeting as a live policy meeting, puts more emphasis on next week's FOMC for forward guidance. With three strikes up vs. the MYR today, we should expect some minor pressure, but with risk sentiment still buoyant and little reason for the Fed to turn off the taps, I would expect USDMYR sellers to emerge on upticks to 3.93 -95 levels. But flows have tapered dramatically so likely a quiet session in store.
Rollercoaster ride for Aussie
A sharp U-turn in WTI oil prices was all it took to send the Aussie spiralling downwards after touching a 10-month peak. Oil prices swung frantically overnight as oil traders played off bullish comments from the International Energy Agency (IEA) which said non-OPEC production would fall this year by the most in a generation. This headline was later offset by the changing expectation on monetary policy after the ECB was viewed more dovish than investors were expecting, sending the USD higher. The stronger USD weighed negatively on commodity prices and coupled with lower prices in the oil patch; the AUD sold off in convincing fashion.
Also, weighing negatively on the Aussie was the big surprise on the US data front of an unexpected decline in initial jobless claims last week to just 247k – the lowest since 1973. This print suggests the market is in store for another strong Non-Farm Payroll gain in April. The market was already shifting focus to next week which brings a heavy central bank calendar with the FOMC, RBNZ, and BoJ all in action. While there is little expectation for the Fed to turn Hawkish, the surprising jobless claim print does intrigue. But with the Fed likely to maintain its dovish tone it should accentuate a further bounce in risk appetite. So I would expect Aussie to remain supported on last night’s dip as traders are more likely to side with this view.
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