Confusion in FX
FX markets start the week directionless and scant motivation to pick a direction. EURUSD has already retraced gains achieved on Friday. Friday weak headlines payroll (164k vs. 190k consensus estimate), while unemployment rate fell to 3.9%, encouraged equity traders yet gained to excite USD bulls. The subdued wage growth lowered the risk of quicker rate hikes at the Fed. General risk on sentiment pressured the front-end of the US treasuries, which supported tech and financial sectors. Commodities have latched on the positive feeling to drive up oil prices (wti $70.69 high) and commodity currencies. Overall, market are waiting for new direction, willing to wait for fundamental guidance. The BoE and RBNZ are expected to hold rates while BoJ and Riksbanks will released policy meeting minutes. Perhaps the most meaningful data will be inflation from the US and Switzerland.
We remain sidelined on the current USD rally, as the rationale remains elusive. Overly short USD positive has been cut while interest rates correlation is inconsistent with pricing patterns. In fact in the G10 only the GBP is now driven by changing monetary policy. We do understand the risk that USD breakout of 3-month range suggests a stronger correction is in the making. However, lacking understandable drivers we would rather wait. Especially since looming deadlines for the Iranian nuclear deal and ominous warning from U.S. President Donald Trump’s attorney, Rudy Giuliani, that other hush payments to women outside pornstar Stormy Daniels was a possibility. Political chaos in the US is now being ignored by the markets, however the closer we get to the midterm elections the higher the risk becomes. As for this week play the range with low probably of a break out expected. Of course, keep our eyes on Turkey were political instability is ramping up.
Oil prices steep rise surprises
Currently trading at November 2014 range, oil rise seems wide opened for further increase, strongly supported by recent macroeconomic events supporting upward commodity prices. Looming US sanctions against one of the largest OPEC producer, Iran, as well as continued economic and political crisis in Venezuela reinforce that global trend started in February 2018.
Bouncing off from 58.23 (14/02/2018 low) and 61.76 (13/02/2018 low) respectively, both US West Texas Intermediate and Brent crude oil futures sharp rise (+16.01% and +20.17% from February low) is expected to strengthen, as Trump administration is likely to disengage from Iran deal this week. Shanghai crude oil futures are meeting the same fate, currently trading at CNY 454 (USD 71.42) and reaching historical high since its start in March 2018.
Therefore, we would expect both oil price futures to converge towards 70.70 and 75.90 in the short-term.
US – China commercial tensions are economically felt
Mnuchin US treasury secretary talks with Chinese premier Liu He on Friday confirmed a rather rough start for both nations who are somehow trying to endeavor a win-win agreement, a relatively less likely scenario as long as both nations won’t get prepared for a “give and take” scheme. Accordingly, Chinese first quarter current account balance deficit above USD 28 billion (prior: USD + 62 billion), a historical low, strongly reflects the fact that both nations must count on much smaller surplus in the near future as long as bilateral tensions are not restored. The final accord on China’s current account surplus over the US could have important repercussion on the CNY, which would be much weaker and volatile if its trade suplus is expected to shrink.
