Last week marked the start of “holiday” season. Statistically with light volume and higher volatility, December is a challenging month though one that can also create good trading opportunities.
Where are we headed? Oil, the US Dollar
Oil and the US continue to dominate market sentiment. There are important implications for currencies as well as stocks. Brent crude reached a new four-year low last week breaking the $70 level, having already fallen more than 38pc in the last 5 months.
This fall is due partly to strength in the US dollar. Oil is dollar denominated so it has an inverse relationship with the currency. Factoring out the US Dollar rise, the fall is still around 34pc over the period.[psx_postimage text=”USD index 2014, rising trend” ]
In the last OPEC meeting, the group agreed to continue to maintain current production levels. Even though this is clearly hurting some of the less-efficient petro producing nations. Some analysts believe this is an attempt by OPEC to keep prices below $90 a barrel. At that level, it makes extraction of shale gas in the US less financially viable.
Frankly, I think this is doubtful. For one thing, this effort would not be sustainable over the long haul. Due to its shale production, the United States is in a much stronger bargaining position with OPEC now than it was 10 years ago. It is more likely that Saudi Arabia, an important ally of the US, is willing to “take one for the team”, at least in the short haul.
They can do this because oil fields in Saudi Arabia have much lower production costs than other areas and a resulting higher margin. With oil literally bubbling out of the ground there, the Saudi’s can afford lower prices and still ensure a profit. This state of affairs keeps the heat on Russia, whose economy is heavily dependent on oil and gas. It also adds welcome stimulus to the world economy.
Inflation, the U.S.
Lower oil prices are filtering through to declining food, transport and energy prices, across the globe. This will amount to a significant stimulus to the world economy over the coming months. FX traders need to factor this into their models as well as the lower probability of interest rate increases in the near term.
Nevertheless, the US seems to be increasingly divergent from the rest of the world. Strong nonfarm payrolls last month showed 214,000 new jobs and a headline unemployment rate which fell to 5.8pc. Next Friday’s employment report and nonfarm payrolls data will be decisive in the currency’s latest uptrend. This will tell us if this economic pickup is likely to be sustained going forward. On Monday and Wednesday too, we will see important data from the business and manufacturing sectors with the release of PMI.
The Euro: GDP announcement
The ECB and Euro zone leaders continue to put out mixed messages regarding their approach to tackle the increasingly stagnant and worrisome Euro zone. The latest figures out showed inflation fell to a five year low. The Consumer Price Index rose just 0.3% on the year. Removing food and energy, Core CPI was a meagre 0.7%. This was partly a reflection of falls in oil prices. Markets however are still unimpressed as the Euro continues to languish. We are awaiting the ECB’s rate decision on Thursday, and their policy statement. However, we are not expecting any fireworks.
Sterling, Autumn Statement
On Thursday, the Bank of England will make its interest rate announcement. In the previous MPC (Monetary Policy Committee) meeting, members voted seven to two for keeping the bank rate unchanged at 0.5pc. Of note though is that committee members did not agree entirely about the state of the economy. No change is expected. The full announcement will be critical as well as the statement on the asset purchasing (QE) program.
On Wednesday, Chancellor George Osborne will give the Autumn Statement and economic forecast.
It will be a busy week for AUD this week too. AUD/JPY continues to trend upwards, largely due to a weaker Asian outlook as well as Japan’s increased stimulus (money printing) program. On Tuesday we will hear the RBA’s interest rate decision and latest statement.
Switzerland held a referendum yesterday regarding its gold reserves. The bizarre proposal was that the central bank (SNB) must hold at least 20pc of its balance sheet in gold. It also called for a repatriation of all gold from abroad. It would also make it illegal to sell any gold reserves. Unsurprisingly, voters rejected the proposal with a large majority. The markets never really took this plan very seriously. Yet despite this gold did briefly fall to 1142 before recovering again.