Trade in the commodity based currencies got off to a wild start this week after Sunday’s energy meeting in Doha between 16 of the key oil producer nations failed in its bid to produce an agreement to cap oil production. Geopolitical tensions between Saudi Arabia and Iran would appear to have prevented a successful outcome. This came after the Saudi’s insisted that Iran would also need to be included in the agreement, an outcome that had previously been ruled out by Iran as they ramp production to pre-sanction levels. Early losses in oil and the commodity currencies have quickly unwound as oil rallied on news that a Kuwaiti oil worker strike would knock 60% (~1.7 million barrels per day) of Kuwait’s oil production offline. The oil rally was once again embraced by the equity markets in a continuation of the theme of a strong link between equities and oil which has prevailed in 2016. Look for commodity based currencies like the CAD, AUD, NZD and NOK to continue to have a volatile week as the speculative positioning in oil unwinds this week in the aftermath of the Doha impasse
The AUD has recovered well from an early setback in trade so far this week. Fresh 2016 highs against the USD have been observed in recent trade come as oil prices and the CRB commodity index have recovered impressively to be trading higher on the week so far. Initial trade on the week saw oil and the AUD marked down after an agreement was not reached in Doha between the oil country producers to cap oil production. Last week saw the AUD trade higher over the course of the week on the back of commodity gains and better than expected March employment data. The jobs growth pushed the unemployment rate lower to 5.7%, although the trend monthly employment growth at 8k has fallen markedly from the highs of around 30k seen last year. Solid gains in the latest housing finance data for both owner occupiers and investors and a surge in business conditions to 8 year highs also helped bolster sentiment. Consumer confidence was seen falling in April, although overall last week’s data does little to add to the case for an RBA rate cut next month. Look for offshore events to drive trade this week given the quiet local data calendar. Also an overnight speech from the RBA Governor and the RBA minutes today will be of interest.
After finishing on a strong footing on Friday the NZD continues to remain well sought after in current trade despite yesterday’s sharp fall in early trade. There has been evidence of some stop loss buying as various resistance levels were breached. The 1% plunge near the open of the week came as oil prices sagged sharply after the weekend’s Doha oil producer meeting failed to produce an agreement to limit supplies. The impasse came about after Saudi Arabia insisted that Iran (who was not in attendance) should also be bound by the agreement. NZ inflation data for Q1 released yesterday has been the other notable event so far this week. The data was slightly higher than the expectations of many economists for the quarter, although at 0.2% matched that forecast by the Reserve Bank (RBNZ). The 0.4% annual number was the seventh consecutive quarter that the annualized number had failed to top 1% (the lower bound of the 1-3% RB target), although expectations for another rate cut at next week’s OCR meeting declined after the result. Interest from here will now turn to tonight’s dairy price auction. General commodity market movements will continue to have strong bearing over the remainder of the week.
The USD has drifted lower since our report on Friday. Data released at the end of the week added fuel to the trend (that had been developing since mid week) after the latest industrial production and Michigan Consumer Confidence reads both disappointed. The Michigan 5-10 yr inflation expectations series also deteriorated after it again fell back to its all time 2.5% lows. Data earlier in the week was also underwhelming after both the retail sales and inflation numbers failed to live up to expectations. Evidence of strength in the labour market remains however, after the latest weekly initial jobless claims number fell to their lowest level since 1973 (a repeat of the week to 4 March). It will be another busy week this week in the US as various Fed members again speak. Data releases include building and housing numbers tonight; manufacturing reads will feature into the week’s end.
The EUR has edged higher against the USD in trade so far this week. The move has been aided by a marginally weaker USD in overnight trade and comes ahead of what will be a much busier week this week for local data. The ECB interest rate decision dominates the week. This will see investors eagerly await the degree of concern expressed by the ECB over the appreciation of the EUR that has occurred since the last meeting. Expect willingness by ECB head Draghi to respond to any downside risks to growth and inflation that should materialise, although expectations of any further easing on top of last month’s move are mixed. Data starts tonight with the ZEW Economic Sentiment survey and euro-zone current account and will conclude with euro-zone and regional PMI’s running into the week’s end. Data last week was lacking but included German and euro-zone inflation numbers that matched expectations and softer than expected EU Industrial Production numbers.
The GBP has moved higher in trade against the USD so far this week. Early declines after the open were noted in line with an oil led risk off theme, although this theme quickly reversed in trade overnight after the oil price recovered from its early Doha failure slump. Events in the UK last week were dominated by the BoE central bank meeting which passed without much fanfare after both rates and the asset purchase target were left unchanged as expected. Inflation numbers released rose to 15 month highs, although remain well adrift on the BoE target and hence represent little threat to a change in monetary policy stance in the near future. Dominating this week’s calendar is tomorrow’s employment data which will be followed by retail sales numbers on Thursday. A scheduled speech by BoE Governor Mark Carney later today is also of note.
The JPY sits near last week’s closing levels in current trade against the USD. An initial jump was observed yesterday after the Doha failure, although these gains were quickly unwound on the back of an oil price rebound and rallies in the key global equity bourses. A second strong earthquake in a few days on the island of Kyushu saw the Nikkei 225 fall 3.4% in trade yesterday after Saturday’s shake. The earthquakes are likely to see heightened demand for JPY from insurers as funds are repatriated for the rebuild. Comments from the weekend G20 meeting which suggested that the recent JPY moves have been orderly also gave the JPY a stronger tone in initial weekly trade. Data of interest last week included a drop in Core Machinery numbers, a slight dip in bank lending and another decline in Industrial Production. Capacity Utilization data released on Friday also fell from the month prior. Comments from the BOJ Governor with the WSJ yesterday included ones which noted the monitoring of the recent JPY strength impact on the inflation dynamics and hints that a further move lower in rates is possible to achieve targeted inflation. Such comments will likely heighten interest around the next BOJ meeting on April 28th.
Like the other commodity currencies covered the CAD has recovered well in recent trade after the setback in early trade yesterday. An initial plunge in the CAD came on the open yesterday as the market reacted to news that the talks between the 16 countries at the Doha meeting had failed to reach an agreement on capping production. The breakdown came after Saudi Arabia insisted that Iran also be bound by the agreement and came despite Iran not being at the meeting and having recently continued to state that they will lift production to pre sanction levels. Prices have recovered in recent trade and now trade higher for the week on the back of supportive inventory data and an oil worker strike in Kuwait which has cut more supply from global markets than the Doha agreement ever promised to. This week is a quiet one in Canada with the key data of note coming at the end of the week (inflation and retail sales. Wholesale Sales is scheduled for release on Wednesday and will come after an earlier speech from the BoC Governor Poloz. Last week in Canada was dominated by the BoC meeting which saw the central bank leave rates on hold as expected. New house price data marginally exceeded forecasts whilst the manufacturing sales number release on Friday which fell sharply on the month prior exceeded the drop forecast.
Major Announcements last week:
- UK Core Inflation, 0.4% m/m vs. 0.3% exp. (Mar.)
- NZ Food Price Index, 0.5% m/m vs. -0.6% prior (Mar.)
- US Retail Sales, -0.3% m/m vs. 0.1% exp. (Mar.)
- BoC Cash Rate, 0.5% as exp.
- Australian Employment, 26.1k vs 18.5 k exp. (Mar.)
- Australian Unemployment Rate, 5.7% vs. 5.9% exp. (Mar.)
- BoE Cash Rate, 0.5% as exp.
- US Inflation, 0.1% m/m vs. 0.2% exp. (Mar.)
- Canadian Manufacturing Shipments, -3.3% vs. -1.5% exp. (Feb.)
- US Industrial Production, -0.6% m/m vs. -0.1% exp. (Mar.)