Predictable King-Trichet

Is it deflation or inflation we are worried about? Speculators and the masses fear inflation. Price fear is driving individuals to the ‘yellow metal’, the real deal, no ‘fool’s gold’ for them! But, current interest rate indicators do not foresee a rising price issue, bond yields remain low. In fact, US 10-years have a better chance of printing 3% first before ever retreating back to $3.50. Gold technical analysts are encouraging investors to hold onto long gold positions as bullion has ‘significant upside potential’ to reach as high as $1,500 an ounce. Where is my Midas touch?

The US$ is weaker in the O/N trading session. Currently it is higher against 1 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Two Cbanks policy meetings take center stage today, the BOE and ECB. The market anticipates that they will remain on hold, both in terms of policy rates and ‘non-standard’ policy measures. Apart from the RBA’s surprising announcement earlier in the week, European policy makers prefer a ‘wait and see’ approach. This will maintain their on-going excuse to ‘evaluate whether the tepid signs of economic recovery find much needed traction’. It would also buy them time to test if their own financial systems function independently without any further support from policymakers. Fundamentally, Europe and the North America are not as ‘hawkish’ as Australia. Analysts expect rates to remain on hold well into next year. What are we to expect from Trichet’s communiqué? Being predictable, expect the same copy from last month’s. European policy maker’s recent rhetoric maintains a note of caution and to expect an ‘uneven’ recovery despite modest signs of improvement in their economies. So, Trichet should reiterate that rates are currently appropriate, hinting at a prolonged period of time for low refi rates. Again, the ECB will confirm that an ‘exit strategy’ is ready but the time for its implementation has not arrived. The current ‘status quo’ is also likely to be reiterated by the BOE. Where is the fun in all this?

The USD$ is currently lower against the EUR +0.67%, GBP +0.70%, CHF +0.75% and JPY +0.39%. The commodity currencies are stronger this morning, CAD +0.66% and AUD +1.59%. After printing its strongest level vs. the USD in over a year earlier this week, the loonie did a temporary about turn on the back of lower oil prices and on the fact that recent strength was over extended. Already this week we witnessed some Canadian fundamentals aiding the loony’s flight. For instance the IVEY PMI (61.7 vs. 56.2) lent support. Digging deeper, the report showed good news on jobs (55.9 vs. 47.5, m/m). An optimist would say that the IVEY employment news would suggest a positive upside risk for Friday’s Canadian jobs report. Market consensus is already looking for a +5k gain. Buying the rumor and selling the fact could endanger the loonies’ weekly strength being unwound with anything less than +5k! The loonie has gained +15% vs. its southern partner and incidentally was the best-performing of G7 currencies against the greenback last week. Expect dealers and speculators to lighten their position ahead of tomorrow’s employment report a tad. It would not be a surprise if the currency managed to achieve parity before Christmas all things being equal!

No wonder Governor Stevens at the RBA remains a firm hawk. The Sept. Australian employment report beat all expectations last night, increasing by +40.6k on the month vs. a forecast of -10k. This probably provides another nail in the coffin for a 25bp rate hike in Nov.! The futures market is currently pricing in a +86% chance of another hike. Will the RBA be ‘gradual’ in its monetary cycle or show rapid normalization of interest rates? (0.9041)

Crude is higher in the O/N session ($70.32 up +75c). Finally, the market is relying on fundamentals to price the black-stuff. Yesterday’s weekly EIA report was bearish for the commodity. With the USD finding some life again, it was only a matter of time before technical resistance levels above $71 would prove again to be impregnable for the market. The weekly report showed that inventories of gas and distillate fuel (includes heating oil and diesel) increased. Gas inventories rose +2.94m barrels to +214.4m, w/w. That was a threefold increase, way more than market consensus. Distillate stocks advanced +679k barrels to +171.8m (the highest print in 26-years!). The gain in gas supplies has left inventories +6.9% higher than the 5-year average. Not to be outdone, distillate inventories are +30% higher for the same time period. Refineries are operating at +85% of capacity, +0.4% w/w. In contrast, crude inventories declined -978k barrels to +337.4m. The market had expected a +2m gain. Despite this, stockpiles remain +10% above the five-year average. Strong evidence that demand destruction is alive and kicking. Global output remains healthy. Russia increased its production last month and has now surpassed Saudi Arabia as the largest produce. They have just added to the global glut of the black-stuff. With energy fundamentals remaining unconvincing, it would be a safe bet that crude should be confined to its $10 range of $65-$75.

It’s difficult to stop a runaway train! Gold managed to print a new record high this morning and looks to improve on its rich vein of strength. It’s the debate of deflation and inflation that spurring the ‘yellow metal’ higher. Investors are concerned that an economic recovery will promote inflation, this despite interest rate product telling us otherwise ($1,058).

The Nikkei closed at 9,832 up +32. The DAX index in Europe was at 5,715 up +75; the FTSE (UK) currently is 5,151 up +43. The early call for the open of key US indices is higher. The 10-year bonds eased 6bp yesterday (3.18%) and are little changed in the O/N session. Dealers temporarily managed to cheapen the curve ahead of the $20b 10-year auction. However, any dips were quickly brought and bonds managed to record its 1st winning day in 4. With the green back strengthening also supported the demand for US debt product. It’s worth noting that indirect bidders (mostly foreign Cbanks) bought 47.4% of the notes. Investors are happy to seek duration (price sensitivity to interest-rate change expressed over time) and today will need to take down $12b long-bond product.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.