Week in FX Europe — No Thanksgiving for OPEC

Energy prices continue to make records. Today, OPEC (the Organization of the Petroleum Exporting Countries) is back calling the shots, and putting the squeeze on global crude producers, commodity currencies, trade balances and Russia in particular, after yesterday’s stand-pat decision to maintain its existing daily production of +30M bpd. This decision pushed the benchmark North American West Texas Intermediate crude oil to trade down -6% to $68 per barrel, a fresh four-year low.

OPEC’s decision has given an upward bias to the mighty U.S. dollar, as lower oil prices are deemed a direct boon to the American economy. OPEC’s bearish position is also managing to send commodity currencies like the CAD ($1.1385), NOK ($6.99), and RUB tumbling. The loonie, as the Canadian dollar coin is known, has been the least effective; dropping one cent outright on expectations that stronger U.S. growth will eventually “rub off on Canada’s economy.” Overnight and outright, USD/RUB has managed to hit a fresh record high ($49.755). Now the FX market will need to be vigilant, it is unknown if or when the Central Bank of Russia (CBR) will intervene in large amounts to stabilize its embattled currency. This will depend on whether or not the CBR regards Russia’s financial stability is at risk.

Russian Bear Tamed by OPEC

Investors should not expect any let up for Russia for the remainder of this year. Russian banks and companies need to pay down +$30B in foreign debt next month. This and potential new sanctions will only heap further pressure on the RUB. This ongoing scenario should exert significant pressure on Russia’s sovereign ratings for next year. Ratings agencies up to now had expected the oil market environment to be much more benign for Russia in 2015.

Deflation Demons Awake on OPEC Decision

After OPEC refrained from cutting its oil output, disinflation remained the key theme in both Asia and European trading sessions overnight. Investors and dealers note that decline in oil prices would make it even more difficult for the European Central Bank (ECB) and the Bank of Japan (BoJ) to push up inflation. This morning’s eurozone November Flash consumer-price index (CPI) estimate came in line with expectations (+0.3%, year-over-year), but matched its five-year low. This makes December’s ECB monetary meetup that much more interesting.

The BoJ is in the same boat. USD/JPY is currently holding above the ¥118 level after Japan’s October National CPI data registered its 17th consecutive year-on-year gain, but at the slowest pace since the consumption tax hike in April; core inflation fell below +1% for the first time in a year. Prime Minister Shinzo Abe’s snap general election call next month will keep investors busy throughout the historically low volatile holiday month.

Will Swiss Tie Its National Bank to a Golden Leash?

Further event risk remains on the fore this Sunday, as the Swiss go to the polls on to vote on whether the Swiss National Bank (SNB) should hold +20% of its reserves in gold. The proposal is to ban SNB from selling gold reserves below this threshold. More than +50% of the electorate needs to vote in favor. The current polls indicate that +38% support the proposal, +47% are opposed, and +15% undecided. Support for the initiative was +44% in October. The SNB is worried that the proposal could curb its ability to set monetary policy.

The bank’s “line in the sand stance,” (defends its cap of 1.20 CHF per EUR) reassured for another three years, complicates the SNB’s policy of buying EURs whenever the currency weakens “too quickly or too far.”

New rules (if voted in), would require the SNB to buy gold to balance any EUR purchases. This would tie policymakers’ hands when trying to conduct standard monetary policy. The pressure on the SNB to defend the franc, especially with the ECB is expanding its balance sheet and looking at other assets it can purchase. The downward pressure should be expected to increase. A “yes” vote would only invite more aggressive speculation — the SNB would be left with few tools to weaken the CHF.

It’s important to remember that the demands of the gold initiatives would not be implemented immediately. The SNB has five years to lift its gold asset share to +20% – this would suggest that betting against the SBN would not be very clever.

What to Expect Next Week

Be ready to hit the ground running next week. The bulk of the market’s attention will again be on central bank decisions and reactions. It all starts with the SNB on Sunday. No matter which way the gold referendum vote goes, investors will want to cash in on some of their longstanding positions. Meanwhile, the Reserve Bank of Australia’s rate decision will kickstart Australasia’s week. The Bank of England, ECB, and Bank of Canada will all make public statements in middle of the week before giving way to the granddaddy of economic indicators: the U.S. nonfarm payrolls report on Friday.

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