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Crude Oil attack undermines weak global economy

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Australia

The Australian Dollar remained broadly within recent ranges propped up by easing tensions between the US and China trade tariffs.  News Friday suggested China have announced that they have excluded some agricultural products including soybean and pork from tariff levies on US imported products. Chinese data out Monday showed Industrial production missed the mark for August publishing at 4.4% after 5.2% was expected. Growth in the sector comes in at the lowest reading in 17 years. Year to date is 5.6% down on the predicted 5.8% markets were expecting. Chinese Premier Li Keqiang said it would be “very difficult” for the country to grow at an annual rate of 6% or more in the current global climate. The Aussie crosses are all lower as we head into Tuesday. The focus this week will be on Australian employment figures printing Thursday and should report a small number (15,000) of new workers were added to the Australian economy in August.

New Zealand

The New Zealand Dollar retreated off 0.6445 Friday against the greenback as the kiwi struggled to push higher. Friday’s Business PMI improved from 48.1 to 48.4 in August but remains below the 50 benchmark economic growth level showing a contraction in manufacturing activity for the second straight month. The last time the index showed a contraction in two consecutive months was October 2012. Despite fresh optimism in the trade war tensions the kiwi underperformed assisted by improving US CPI and Retail Sales releases. This week with the Federal Reserve announce their cash rate and monetary policy- this may keep the kiwi bid as expectations of a cut to 2.0% from 2.25% should put pressure on the big dollar.

United States

President Trump has ordered use of emergency crude oil reserves in the wake of an attack on a Saudi Arabian oil field. He also confirmed the US were “locked and loaded” pending official confirmation of the culprit which would deem the terms of how they would proceed. Military experts have used satellite imaging to assist the US administration to ascertain where the drones most likely came from. Pictures clarify this to be most likely Iran or Iraq. China is considering dropping tariffs on US farm imports ahead of planned talks with US negotiators as an act of goodwill. It’s reported that China may allow Chinese companies to continue to purchase agricultural products ahead of the upcoming trade talks. The products being considered are pork and soybean but volumes are still undecided. China has banned all US farm imports since August. We have been led down the garden path with similar news previously so concrete support of such a move is needed. On the data front we have crude oil inventories which will be an interesting publication and could affect the crude price dramatically along with the crucial Fed cash rate and monetary statement. Consensus is that we should see a cut from 2.25% to 2.0%. This has largely been priced into the curve but we will certainly get the usual volatility around the release on Thursday at 6.0am NZT.

Europe

As we expected the ECB made special note of fresh easing to start in October to boost the eurozone. They cut the benchmark rate a further 0.10% from negative 0.4% to -0.5%. Eurozone central bankers were broadly disappointed with Mario Draghi’s stimulus package and rate cut, doubting its effectiveness. Germany’s Weidmann said the program “overshot the mark”, “such a far reaching package was not necessary”. He went on to say “This decision to buy more public debt will make it harder for the ECB to exit from this policy, the longer it lasts, the more the side effects and financial stability risks of the very expansive monetary policy will grow.” The EUR continues to firm post last week’s ECB, this week on the calendar we only have German Economic sentiment in focus.

United Kingdom

The British Pound was the strongest performing currency of the G10 players last week gaining 2.5% over the New Zealand Dollar. Boris Johnson is still trying to negotiate a deal with the EU. Last week a bill was passed taking any prospect of a no deal Brexit off the table in the near term. BJ meets with Jean Claude Juncker Monday to discuss ideas for replacing the Irish backstop in Luxembourg. Boris spoke over the weekend to media saying there were “real signs of movement” from Berlin, Paris and Dublin on getting rid of the backstop – “a huge amount of progress is being made”. We suspect this could be all wind from Johnson, time leading up to 31 October is fast running out to piece together a Brexit deal after. Boris has put off requests for an extension past 31 October. The Pound has risen to its highest level since July against the greenback on market hopes that a deal will be forthcoming. On the data front the Bank of England announce their official cash rate and monetary policy Thursday night.

Japan

Bank holiday Monday in Japan as the country celebrates Respect for the Aged Day. The Bank of Japan come together Thursday to announce their cash rate and talk about their monetary policy. The decision to ease will be a close one to take rates further into negative territory. The Yen made small gains Monday after Saudi Oil field attacks crippled oil production in the area, sparking a massive 20% rise in crude oil. Risk this week could be driven by further news and headlines which follow. This being said we expect equity flows this week to drift negative bringing into effect possible safe haven JPY purchasing by investors.

Canada

A drone attack on a Saudi Arabian and Khurais oil field has taken out half of Saudi Arabia’s oil production as massive fires broke out. The closure will impact 5% of the world’s Oil production with 5 million barrels per day processing from the area offline. Houthi rebels took responsibility for the drone attacks pledged that more hits could be expected in the future. The Iran backed rebels have claims recent assaults on a number of Saudi Arabian pipelines and other key infrastructure as tensions heat up in the region. The price of Crude gaped from 54.00 to just shy of 61.00 Monday on the open instantly strengthening the Canadian Dollar against a board of currencies and from 1.3280 to 1.3220 against the greenback. The biggest decline was in the AUDCAD cross sending it from 0.9140 to 0.9070.  The crude oil price change is the single biggest disruption ever, bigger than when Saddam Hussein invaded Kuwait in 1990. Saudi Arabia has the ability to restart a major volume of oil production over the following few days, but it will take weeks to restore capacity to full production. This week on the calendar in Canada is Thursday’s monthly CPI and late Friday’s Retail Sales.

Major Announcements last week:

• Japan Holiday Monday
• Iran suspected to have drone bombed a Saudi oil field.
• Crude Oil gapes to 62.50 from 54.00 on the weekly open after oil field attacks
• The ECB introduce a new QR package starting November
• US CPI prints bang on expectations at 0.1% m/m
• US Retail Sales releases at 0.4% from 0.2% predicted

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