Oil prices skyrocketed yesterday following attacks on Saudi Arabia’s refineries over the weekend. Some of those gains were scaled back during the Asian trading Monday, but oil-bulls retook control during the US session. Elsewhere, the meeting between UK PM Johnson and EU Commission President Juncker failed to result in any breakthrough, with Johnson reiterating that the UK will leave by Oct. 31st, with or without a deal, which means he is ready to defy the law forcing him to ask for a new extension.
The dollar traded higher against all the other G10 currencies on Monday and during the Asian morning Tuesday. It gained the most against NZD, AUD and EUR in that order, while the currencies against which the greenback eked out the least gains were the oil currencies CAD and NOK.
Yesterday, it was all about the energy market and oil. Both WTI and Brent opened the week with huge positive gaps following drone attacks on Saudi Arabia’s refineries over the weekend. The incident has cut off half of the kingdom’s oil production, which is around 5% of the global output. Oil prices surged around 15%, marking their biggest intraday jump since 1991. Some of those gains were scaled back during the Asian trading Monday after US President Donald Trump authorized the release of emergency stockpiles in order to compensate for some of the lost supply, but the retreat was proved to be a temporary correction before another leg of buying. During the US session, oil bulls retook control, perhaps due to headlines saying that Saudi Aramco may need months to return to normal production volumes.
The heightened geopolitical tensions had an impact on the broader market sentiment as well. In the FX world, as we already noted, the oil-linked currencies were among the gainers, while during Monday’s early Asian trading, both safe havens, the yen and the franc, came under buying interest. The other risk-linked currencies, Aussie and Kiwi, were the main losers. In the equity sphere, major EU and US indices ended their trading in the red, while in Asia today, although Japan’s Nikkei closed 0.06% up, China’s Shanghai Composite fell 1.74%.
That said, the reaction in other markets was not as huge as in oil prices, and this may be because investors preferred to stay relatively on guard ahead of tomorrow’s FOMC decision. This will be one of the “bigger meetings”, which are accompanied by updated economic projections, as well as a new “dot plot”. Up until Friday, the financial community was convinced that the Committee will cut rates by 25bps at this gathering. However, the probability for such an action has declined to 65% by this morning, according to the Fed funds futures. In our view, officials are very likely to push the cut button tomorrow, but the big question is whether they will satisfy market expectations with regards to future actions. Apart from a September cut, investors are nearly pricing another one by year-end and thus, if the Fed fails to clearly signal such intentions, the dollar could stay under buying interest.
The oil market had a strong rally yesterday, due to the Saudi oil refinery attacks during the weekend. From the technical side, we saw WTI oil opening with a huge gap to the upside, which automatically placed the price above its key 58.85 resistance barrier. Yesterday, the commodity ended the day in the positive territory, hitting the high near the 63.46 level. The black liquid might continue drifting further north, as global oil supply issues remain, but first we may see a small correction before another leg of buying. This is why we will stay somewhat bullish for now.
If the commodity moves slightly lower, but fails to drive below the 61.00 hurdle, marked by the highs of July 11th and 15th, that area might be seen as a good bouncing ground for the price. If so, WTI oil may rise again, as more buyers could be joining in and pushing it to yesterday’s high, at 63.46. If that barrier surrenders to the bulls, the commodity would confirm a forthcoming higher high and could end up moving to the 64.00 level, or even to the 64.77 zone, marked by the high of April 30th.
In order for us to consider slightly lower areas, a price-drop below the above-mentioned 58.85 hurdle is required. This way, the bulls might get spooked temporarily and WTI oil may slide to the 57.27 area, marked by the inside swing low of September 10th. The commodity might rebound back up a bit, but if the price stays below the 58.85 hurdle, this could lead to another round of selling, possibly bringing WTI oil below the 57.27 zone and targeting levels like the 56.45, or the 55.80, where the last one is marked by Friday’s high.
After gaining against all the other G10s on Friday, the pound traded in a quiet fashion yesterday, staying within a ±0.30% range against all but three of its peers. It gained more against NZD, while it underperformed by more versus USD and CAD.
On Friday, the British currency took another shot in the arm following news that UK PM Boris Johnson would meet with EU Commission President Jean-Claude Juncker for Brexit talks on Monday. That said, the meeting failed to result in any breakthrough with both sides just agreeing to intensify talks. It is also worth mentioning that Johnson reiterated that the UK will leave the EU by October 31st, with or without a deal, which means that he is ready to defy the law which forces him to ask the EU for a new Brexit delay. Today, we have the hearings of the UK Supreme Court over whether Parliament’s suspension was lawful or not. However, it is not clear when we will get a final decision.
As for our view, yesterday’s developments pour some cold water on hopes that a no-deal Brexit can be averted on October 31st and may keep the pound in a corrective mode for a while more. We would prefer to exploit any pound gains against the Aussie and Kiwi, which came under selling interest following the attacks in Saudi Arabia and could stay pressured if the situation remains tensed.
Speaking about the Aussie, overnight we got the minutes of the latest RBA meeting. The minutes reiterated the view that members would ease monetary policy further “if needed”, but there were no clear hints on whether the next cut may come. Thus, we will stick to our guns that the “if needed” part suggests that officials may refrain from acting in October, and instead wait for November and December. It seems that the market holds the same view as well. According to the ASX 30-day interbank cash rate futures implied yield curve, the probability for an October cut lies at 32%, while the chance for something like that to happen in November stands at 76%. A 25bps cut is fully priced in for December.
After yesterday’s small correction lower, GBP/AUD has rebounded from the 1.8084 area and is now showing willingness to travel back up again. This morning, the pair is already knocking on the door of Friday’s high, which is around the 1.8200 hurdle. If we see the rate climbing above that hurdle, this would confirm a forthcoming higher high and we may then target areas last seen in the end of August. Also, let’s not forget that the pair is still running above its short-term upside support line taken from the low of July 30th. This is why for now, we will stay cautiously-bullish.
As mentioned above, a break of the 1.8200 barrier could invite more buyers into the game and the pair could easily climb to the 1.8237 zone for a quick test. That zone marks the high of August 28th. This is where the rate might stall initially, but if the buying continues, a break of that zone might clear the path towards the next potential resistance area, at 1.8336. That area is the highest point of August.
Alternatively, if GBP/AUD reverses sharply and falls below the 1.8084 hurdle, which is yesterday’s inside swing low, this may spook the bulls from the field for a while and send the rate lower. This is when we will aim for the 1.8053 obstacle, a break of which could lead the pair to the 1.7988 zone, marked by the high of September 12th. GBP/AUD might stall around there, as it would also be testing the 200 EMA on the 4-hour chart. That said, even if the rate rebounds back up a bit, as long as it stays below the 1.8053 barrier, we will continue to look south. If GBP/AUD makes another move down and bypasses the 1.7988 area, we will then aim for the 1.7937 level, marked by the intraday swing low of September 12th. Also, around there, the pair may test the aforementioned upside line, which may provide additional support.
During the European morning, Germany’s ZEW survey for September is coming out. The current conditions index is expected to have declined to -15.0 from -13.5, while the economic sentiment index is forecast to have risen to -38.0 from -44.1.
From the US, we get industrial and manufacturing production data for August. Both IP and MP are forecast to have rebounded 0.2% mom, after sliding 0.2% and 0.4% respectively. The API (American Petroleum Institute) weekly report on crude oil inventories is also due to be released, but as it is always the case, no forecast is available.
We also have one speaker on today’s agenda: ECB Executive Board member Benoit Coeure.
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