Today, the spotlight will fall on the US employment report for November, as investors try to figure out whether the Fed will cut interest rates further in the months to come, despite the Committee’s signals at the latest meeting that it would take the sidelines. Focus will also be on the formal announcement of the OPEC’s decision on oil output, with yesterday’s headlines suggesting a 500k production cut. Canada’s jobs data are also on today’s agenda.
The dollar continued trading lower against all but one of the other G10 currencies on Thursday and during the Asian morning Friday. It underperformed the most against GBP, NZD, and NOK in that order, while it lost the least ground versus CHF and AUD. The greenback was fractionally higher only against CAD.
In the equity world, most major EU indices closed in negative territory, with the UK’s FTSE 100 on the top of the list, perhaps due to the extended rally in the pound on the back of heightened expectations that the Conservatives will gain parliamentary majority at next week’s elections. We repeat once again that many companies of the index generate profits in other currencies, so in a strengthening GBP environment, if those profits are converted into pounds, they worth less. That said, risk appetite improved somewhat during the US session, as well as during the Asian trading today, perhaps due to more positive remarks over the US-China trade sequel.
Yesterday, US Treasury Secretary Steven Mnuchin said that trade talks are on track, while US President Trump noted that those discussions are “moving right along”. Nevertheless, the gains in the equity world may have remained capped due to a WSJ report, which also said that the negotiations are on track, but added that the two nations remain at odds over the amount of US farm purchases China should make. It could also be that participants remained cautious ahead of the US employment report for November, due out later today.
Nonfarm payrolls are expected to have increased 186k, more than October’s 128k. However, bearing in mind that Wednesday’s ADP report showed that the private sector gained 67k, we see the risks surrounding the NFP forecast as titled to the downside, although the two time-series (at the time of the release) are far from reliably correlated. The unemployment rate is forecast to have remained unchanged at 3.6%, while average hourly earnings are anticipated to have accelerated somewhat, to +0.3% mom from +0.2%. Barring any revisions to the prior monthly prints, this would keep the yoy rate unchanged at +3.0%.
At the latest FOMC meeting, the Committee decided to cut interest rates by 25bps as was widely anticipated, but signaled that it is planning to stay side-lined, unless things fall out of orbit. However, market participants remained unconvinced that policymakers are done cutting rates, and according to the Fed fund futures, they see another 25bps decrease in July next year. A soft reportcould bring that timing forth, while a decent one, although it is unlikely to vanish expectations with regards to more cuts, it could encourage participants to push the aforementioned timing back.
EUR/USD traded higher yesterday, breaking back above the 1.1090 zone, which acted as the upper bound or the sideways range that was containing most of the price action since November 5th. Given that the rate is now trading above that hurdle, we see decent chances for the recovery to continue for a while more.
If the bulls are strong enough to drive the battle above the 1.1115 barrier, which is fractionally below the peak of December 4th, and slightly below an intraday swing low formed on November 5th, then we may see extensions towards the high of the later date, at around 1.1140. If they are not willing to stop there either, then the advance could be extended towards the 1.1175 territory, which provided decent resistance on October 21st, 31st, and November 4th.
Looking at our short-term oscillators, we see that the RSI lies near its 70 line, but it is flat, while the MACD, already positive, lies slightly above its trigger line, but points sideways as well. Both indicators detect upside speed and support the notion for some further near-term advances, but their flattening suggests that a small retreat may be on the cards before the next leg north, perhaps for EUR/USD to test the 1.1090 barrier as a support this time.
In order to abandon the bullish case and turn back flat, we would like to see a dip below 1.1065. Such a move may confirm the rate’s return back within the pre-mentioned range, and could open the door for more declines within that range. The bears may target the 1.1030 area, the break of which could allow extensions towards the 1.1005 level, or the lower end of the range, at around 1.0990.
Moving to the energy market, oil traders are likely to keep their gaze locked in Vienna and the OPEC+ gathering. Headlines yesterday suggested that the alliance agreed to an extra production cut of 500k barrels per day, though the agreement will be formally announced later today. Brent oil gained 0.43% yesterday, while WTI traded 0.12% lower. This suggests that oil traders were far from excited with the outcome, perhaps as this was seen as a move to narrow the gap between the prior target and the over-compliance from several producing members. It could also be due to anticipation that US shale producers will continue pumping at records, thereby keeping supply at decent levels. As for our view, formalizing a decision could allow oil prices to trade higher for a while, but due to the aforementioned reasons, we are reluctant to call for a healthy long-lasting uptrend.
Given that Canada is a major oil exporting nation, CAD-traders will also pay attention to the OPEC+ formal decision, but they will also keep an eye on Canada’s jobs data for November. The unemployment rate is expected to have remained untouched at 5.5%, while the employment change is forecast to show that the economy has gained 10k jobs after losing 1.8k in October. On Wednesday, the BoC turned back neutral, keeping interest rates unchanged and saying that it is appropriate to maintain the current level of the overnight rate target. Thus, a decent report may give more reasons to policymakers for keeping their hands away from the easing button.
Brent crude oil edged north yesterday, but hit resistance slightly above the 64.55 zone and then, it retreated somewhat. Overall, the price continues to trade above the upside support line drawn from the low of October 3rd, and thus we would consider the near-term outlook to still be positive.
The current retreat may continue for a while more, perhaps for the price to test once again the 63.45 support zone, but the bulls could take charge from there and push back up. They could retest the 64.55 zone, the break of which would confirm a forthcoming higher high and may open the way towards the 65.60 territory, marked by the high of September 19th.
Looking at our short-term oscillators, we see that the RSI lies above 50, but points down, while the MACD, although above both its zero and trigger lines, has started topping. These indicators detect slowing upside speed and support the case for some more retreat before the bulls decide to take the reins again.
Now, in case Brent falls below 63.45, this could signal the start of a somewhat larger negative correction. The decline could then be extended towards the 62.90 barrier, marked by the inside swing high of December 2nd, or the peak of the following day, at around 62.35. Slightly lower lies the aforementioned upside line, which could provide support in case the 62.35 zone fails to do so.
Apart from the US and Canadian employment data, we also get the preliminary UoM Consumer sentiment index for December, alongside the 1-year and 5-year inflation expectations. The consumer index is expected to have inched up to 97.0 from 96.8, while no forecast is available for the inflation expectations.
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