December Fed rate hike priced in but fundamentals favour EUR
The US dollar depreciated on Friday touching a five week low against major currencies. The US Thanksgiving holiday truncated the week with European economic data outperforming US indicators. The US closed the week with disappointing purchasing manager index (PMI) estimates in the manufacturing and service sectors. European PMIs beat estimates and on Friday German confidence data rose more than forecasted. US President Donald Trump will meet with Senate Republicans to discuss the vote on the Senate bill to be voted later in the week.
The euro was boosted by political news out of Germany. After German Chancellor Angela Merkel failed to reach a coalition with three other parties the head of Germany’s second largest party and former partner in the grand coalition was seen relaxing his opposition to once again form a partnership with Merkel’s SDU. Earlier in the week the German leader had said that she preferred a new round of elections than a minority government.
Stability in German politics also boosted the pound. The British currency reached a 2 month high after the Brexit divorce is now more likely to be smoother than the original rhetoric from both sides made it seem. Prime Minister Theresa May still has to convince her own party and the EU that they will pick up the tab for the divorce if the UK wants to move onto trade negotiations.
Organization of the Petroleum Exporting Countries (OPEC) will meet in Vienna alongside Russia and the other major producers that have taken part in the production cut agreement. The deal is set to expire in March, but comments from both camps have hinted at a possible extension that could very well be announced at the end of the summit. The energy producers will meet on Thursday, November 30.
The EUR/USD gained 1.03 percent this week. The single currency is trading at 1.1909 due to positive indicators and some headway into a new coalition in German politics. The pair was flat earlier in the week but the miss in US durable goods sales (–1.2 percent). The main event in the US before the Thanksgiving holiday was the publication of the Federal Open Market Committee (FOMC) minutes from the November meeting. The market is already pricing in a rate hike in December, but further evidence of the internal debates regarding US inflation were expected. The minutes did not disappoint as there seems to be a strong contingent of Fed voting members who are concerned with weak inflation. That anxiety is not likely going to affect the coming rate hike, but will dampen the pace of rate hikes in 2018.
The Conference Board will release the US consumer confidence report on Tuesday, November 28 at 10:00 am EST. American consumers have remained optimistic about economic conditions, but sometimes that confidence has not correlated to increased spending. US preliminary quarterly GDP will be published on Wednesday, November 29 at 8:30 am EST. Economists are forecasting a 3.3 percent gain in a refinement on the first estimate. Manufacturing PMI data will be published by the Institute for Supply Management on Friday, December 1, at 10:00 EST with the disappointing advanced manufacturing PMI data from Markit on manufacturing posted earlier today, investors will be closely following the release.
The USD/CAD lost 0.46 percent in the last five trading days. The currency pair is trading at 1.2711 as the softness of the US dollar combined with higher oil prices. Weak Canadian retail prices on Thursday were not enough to stop the loonie rally. Sales rose less than expected in September despite gas prices rising. Vehicle and clothing purchases declined validating the caution expressed by the Bank of Canada (BoC) of late. The central bank hiked twice in 2017 putting the Canadian benchmark rate at 1.00 percent, but with concerns about NAFTA, economic growth slowing down are enough to keep the BoC in the sidelines until next year.
Friday, December 1 will be a busy week for CAD traders. Statistics Canada will release the monthly GDP figures as well as the employment report both at 8:30 am EST. GDP is expected to have shrunk by 0.1 percent and there is some anxiety on the job front as the first ADP job report for Canada showed a loss of 5,700 in October.
Energy prices continued to gain during the week. The price of West Texas Intermediate is trading at $58.48 after a weak dollar and Russian Energy Minister comments supporting a possible extension of the OPEC production cut agreement. Oil ministers will meet in Vienna on Thursday a year after a deal was reached to reduced crude production to stabilize prices by the Organization of the Petroleum Exporting Countries (OPEC). Russia and other major producers joined the agreement in December, and have already extended the deal until March of 2018, but the likely outcome from the meeting in Vienna is a second extension. The main topic of debate is for how long as different timelines have been discussed. Russia has taken the leadership position in a time when Saudi Arabia is opening too many fronts in the diplomatic arena.
The mercurial nature of OPEC members has already resulted in failed summits in the past, but it appears that Russia is seen as a conciliatory third party that could push through an extension.
Market events to watch this week:
Tuesday, November 28
- 2:00am GBP Bank Stress Test Results
- 10:00am USD CB Consumer Confidence
- 11:15am CAD BOC Gov Poloz Speaks
- 3:00pm NZD RBNZ Financial Stability Report
Wednesday, November 29
- All Day All OPEC Meetings
- 8:30am USD Prelim GDP q/q
- 10:30am USD Crude Oil Inventories
- 7:00pm NZD ANZ Business Confidence
- 7:30pm AUD Private Capital Expenditure q/q
Thursday, November 30
- 8:30am USD Unemployment Claims
Friday, December 1
- 4:30am GBP Manufacturing PMI
- 8:30am CAD Employment Change
- 8:30am CAD GDP m/m
- 10:00am USD ISM Manufacturing PMI
*All times EDT
