Pick Your Poison: ECB, Brexit, NFP Or OPEC

Thursday June 2: Five things the markets are talking about

Investors seem to have upped the ante on the caution front ahead of key meetings from the European Central Bank (ECB) and OPEC in Vienna, Austria, today.

Risk aversion strategies have been dominating market moves in the varying asset classes in the overnight session.

Global equities are having problems finding some traction; the dollar has come under pressure against its Tier I pairs (EUR, JPY and GBP) and debt yields are falling.

Today’s events could be considered the appetizer ahead of tomorrow’s main course – U.S non-farm payrolls (NFP). Will investors be disappointed?

Currently, the event risk is that for all the speculation about what may come out of these meetings; the reality could be the end result may be little changed.

1. ECB forecasts, hints on policy focus

The European Central Bank (ECB) will announce its latest interest rate decision ahead of the U.S open followed by a news conference with ECB President Mario Draghi.

Most analysts expect no major announcements, with emphasis on implementation and assessment of already announced measures. However, there is definitely strong market speculation that Euro inflation forecasts may be revised higher, if so, this could change the dynamics of their QE program.

If there is any leaning towards the possibility of tapering QE, and it’s an outside if, the EUR bears are expected to come under immediate further pressure – EUR/USD is up +0.2% at €1.1208.
The consensus view is that Draghi will toe the party line and emphasise ‘low or lower rates for longer’ and wait for the Fed to do most of the heavy lifting. This could be awhile as Fed Funds futures probability of a June move continues to slide and is now registering below +20%.

2. Can OPEC surprise?

Expectations of a consensus agreement at todays meeting in progress could hardly be lower. There are too many moving parts and strong self-interests to overcome.

Crude oil prices tried to rally in late U.S trading yesterday after reports that OPEC is working on agreement that could accommodate Iran as it ramps up production to pre-sanction levels. Even a ceiling to output was under consideration.

However, even time a new progress report has thus far surfaced, another self-interest member seem to quickly squash the potential of it happening.

There are a number of reasons that many observers have announced the death of OPEC. The Saudi’s have refused to act as the “swing” producer; they prefer to follow through on their “market share strategy.” Then there is the rise and existence of non-OPEC producers – U.S shale producers have contributed to the collapse of crude prices. Global market demand continues to be a problem or is it?

Not helping crude prices late yesterday were the API inventories numbers showing a surprise build for the first time in three-weeks. U.S. weekly crude stocks rose to +2.350m from -5.137m in the preceding week.

3. Is Japan moving away from currency manipulation?

The Yen touched a new two-week high outright (¥108.93) earlier this morning after PM Abe announced yesterday delaying his second scheduled sales-tax increase expected for April, 2017.

Some traders are looking at this latest move by Japan’s PM as a fiscal step that could potentially detract from more aggressive BoJ policy moves in the second-half of the year, particularly as their economy tackles the likely Q2 contraction headwind due to their last earthquake impact.

With Abe planning to pass a new fiscal stimulus package this fall (no details yet), yen ‘bears’ believe this signals a shift away from a multi-year policy of monetary easing pursued by the BoJ – between 2012-2105 the yen has fallen by nearly -40% against the dollar.

More fiscal stimulus does not necessarily require aggressive monetary stimulus in the future or does it? The BoJ, like so many other Tier I central banks, have been hoping or expecting that the Fed would take the lead on higher rates. This would take some of the heavy lifting off the respective Central Banks.

Tomorrow’s non-farm payroll (NFP) should go along way to determine whether the U.S economy is strong enough to support a rate increase from the Fed in the coming months. Higher rates are expected to support the dollar as the currency becomes more attractive to yield-seeking investors – especially NIRP restricted investors.

4. GBP likely to encounter headwinds

It’s been a tough week for the pound. It been knocked about by every Brexit referendum poll release and bookies odds. The E.U to stay or leave referendum is three-weeks away, and investors can expect no let up in currency movements any time soon.
Already this week, month-end requirements, new Brexit positioning and technical resistance/support (GBP/JPY 164.00 and EUR/GBP €0.7575) levels have managed to trigger a plethora of stop-loss orders in the pound vs. the majors.

In the past three-sessions, GBP is trading down -3c (£1.4430) since failing to reach last week’s outright high of £1.4740. The pound is being seen as rather vulnerable after gaining strongly recently on a perceived lower risk of a U.K. vote to exit the E.U on June 23. Recent polls and bookie odds continue to be streets apart, but that gap is closing.

Earlier this week, spread betters William Hill indicated that +85% of referendum bets over last weekend’s Bank holiday was for the ‘leave’ and this has required them to shorten their ‘leave’ odds. While the latest ORB/Telegraph poll also shows the gap closing – +51% for staying in E.U (down from +55% on May 23) and +46% for leaving (up from +42%).

5. Will U.S jobless claims stop falling ahead of NFP?

Excluding event risk from further afield (Brexit), for Fed watchers the next two days of U.S economic releases will be key in determining whether there is a Fed rate increase on the table in a couple of weeks.

All eyes will naturally be on tomorrow’s U.S May jobs report (+159k e), but first, the U.S Labor Department this morning will release its latest data on jobless claims and then there is the ADP non-farm employment report (+174 e) at 08:15am EDT. The claims report at 0:830am EDT is closely watched, but is also considered a volatile “proxy” for layoffs across the U.S. economy.

The consensus expects +270k new claims (in the week ended May 28). This would indicate a +2k increase from the previous report and break a two-week streak of declining claims.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell