The latest minutes from the Federal Reserve left market participants puzzled as monetary policy makers remained divided over when to move interest rates. As a result, the dollar was sold heavily against its major peers, falling more than 1% against the euro, pound and yen for the week.
Although speeches last week from Fed Presidents John Williams, William Dudley and Dennis Lockhart all indicated a possible rate hike by September, futures markets are only pricing a 12% likelihood for a hike next month and less than 50% chance for December.
Will Yellen give the green light?
Markets are clearly saying to Fed officials we don’t believe you guys, and unless your boss says it out clearly, do not expect your words to be taken seriously.
Well, this time markets will have the chance to hear from Chair Janet Yellen when central bankers from around the world gather for an annual meeting in Jackson Hole, Wyoming on Thursday. Many investors hope her speech on Friday will provide more clarity on the Fed’s next move, however we don’t expect much on the timing. She would likely focus on the bigger picture as the topic suggests “designing resilient monetary frameworks for the future” which could be interpreted as a dovish message, and keep the greenback under some pressure.
On the U.S. data front, new and existing home sales are scheduled for release along with orders for durable goods, Markit’s PMI surveys, consumers’ sentiment and second GDP reading.
Oil: From a bear to bull market territory in just 11 trading days
Oil has been the most interesting trade so far this month. After Brent fell into a bear market territory on Aug-2 (dropping by more than 20% from it’s recent highs), it took traders 11 trading days to swing it back into a bull market territory with prices closing above $50 for the first time since July-4.
Although we were bullish on Oil when prices approached $40 at the beginning of August, I think the rally in such a short time frame has been really overstretched. A $9 advance in three weeks cannot be justified when looking at fundamental and betting solely on OPEC members to reach a deal on freezing production might disappoint.
Last week showed that U.S. oil drillers continued to bring more rigs online, with 10 added to reach 406. This is the longest recovery in more than two years and suggests the decline in U.S. production is close to an end.
I believe that bears are ready to attack at any time now, so any further gains could be seen as an opportunity to go short.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
Investor anxiety gripped the global markets on Monday with tension heightening ahead of Friday’s Jackson Hole meeting which could offer clarity on when the Fed plans to break the tradition of central bank caution. Asian shares concluded mixed with the Nikkei edging higher following Yen’s weakness which provided exporters in Japan a welcome boost. In Europe stocks meandered between losses and gains as the combination of uncertainty ahead of Friday and risk aversion repelled investors from riskier assets. Wall Street was vulnerable to losses on Friday and may follow this negative path if the bearish domino from Asia and Europe entices sellers to attack.
With the mass still heavily bullish on stocks despite the bearish fundamentals it seems likely that the driver behind the impressive gains remains sentiment. Oil’s sharp resurgence and optimism over central banks intervening have elevated investor risk sentiment consequently propelling global stocks higher. It should be kept in mind that the abrupt rise in oil prices has been based on expectations over a potential production freeze while concerns still linger over the state of the global economy. Sentiment may be quick to change and once it goes back in line with the painful fundamentals then stocks could be left vulnerable to heavy losses.
Dollar gains on US hike hopes
Dollar bulls received further encouragement on Monday as upbeat comments from U.S Federal Reserve policy makers on the strength of the US economy bolstered hopes of a potential US rate hike in 2016. The fluctuating expectations over if the Fed would take any action heavily punished the Dollar last week with the Fed divide providing a foundation for bears to attack prices. Although sentiment towards the Dollar and US economy remains somewhat bullish, the Federal Reserve may wait for further domestic data to rationalise raising US interest rates in December. Investors may direct their focus towards the Jackson Hole gathering on Friday which could offer some direction on when the Fed may take action. A hawkish Yellen could install bulls with inspiration consequently sending the Dollar Index higher.
From a technical standpoint, the Dollar Index still remains bearish on the daily timeframe and previous support at 95.00 could become a dynamic resistance that opens a path towards 94.00.
GBPUSD breaks below 1.3100 Sterling received punishment on Friday following talks that Theresa May; UK prime minister could invoke the article 50 in April consequently triggering the formal EU exit negotiations. Although the pound was provided a lifeline last week from the string of positive domestic data which alleviated some Brexit concerns, the persistent uncertainty continues to leave prices extremely vulnerable to losses. Sentiment towards the Sterling remains bearish with prices poised to further declines as expectations heighten over the Bank of England cutting UK rates to near zero before year end.
The Sterling remains pressured with the potential divergence in monetary policy between the Fed and BoE encouraging sellers to send the GBPUSD lower. With the economic calendar light today, price action could prevail and this may keep the GBPUSD depressed.
WTI elevated by freeze deal hopes
Oil has been chaotic this month with prices charging into a bull market as expectations inflate over a production freeze deal in September’s informal OPEC meeting. Oil sensitivity amid oversupply concerns continues to intensify speculative boosts in prices which have attributed to the commodity entering a bull market in only eleven trading days. Last week showed incessant build ups in US oil rigs while Iraq seeks to boost crude oil shipments above 5% in the next few days. Many questions must be asked about the sustainability of the current market rally since the awful combination of oversupply worries and fears of slowing demand still linger. If September’s informal OPEC meeting concludes with no production freeze deal then bears may be enticed to send oil prices back towards $40.
Currency spotlight – USDJPY
The USDJPY was on a slippery slope last week with prices breaching below 100.00 as the cloud of uncertainty around when the Fed may raise US rates weakened the Dollar consequently encouraging sellers to install repeated rounds of selling. This pair remains bearish on the daily timeframe and the potential combination of Dollar vulnerability and Yen strength from risk aversion could drag prices much lower. From a technical standpoint, previous support around 101.50 could act as a dynamic resistance that encourages a steeper decline back below 99.50.
The New Zealand dollar managed to life today as US dollar selling was strong before the London fix. It has so far managed to buck the trend for currencies recently as its strong bullish rally has been a case of the strong fixed interest rates as the FED continues to look dovish. Attention however will turn tonight's all important trade balance data which is expected to show a deficit of -323M. This prediction is most likely already priced into the market, but the last four trade balance readings have been positive and dairy prices have started to rebound as well, all of which could play into the hands of kiwi bulls looking to push the NZDUSD higher.
Technically speaking, the NZDUSD has been very strong and the recent trend line has so far held out, and the drop today found strong support at the 20 day moving average, as it looked to stop any further bearish movements. However, on the H1 we saw a double top and a reversal pattern start to form, and I would be hesitant before looking to see the bulls take complete control again early on. Any further highs are likely to find stiff resistance at 0.7311 which has so far held out against the bulls. A rejection of this level could lead to the bears charging back into the market and a genuine sell-off in the NZD and it will be interesting to see how the trade balance data affects the movements for the NZDUSD.
Canadian bulls are doing some soul searching recently as the Canadian economy continues to struggle on the back of the results from Friday evening which showed core retail sales m/m dropping sharply to -0.8% (0.3% exp) - a big hit for the Canadian economy which has been looking for the retail sector to pick up during the summer spending period. On top of this, CPI data m/m showed a dip to -0.2% (-0.1% exp) which will not be helping confidence in the economy. The only ray of light for the Canadian economy was wholesale sales m/m lifting to 0.7% (0.1% exp). Overall, though the rest of the week is unlikely to receive anymore positive news as the USD will be the main driver, and with Jackson Hole happening it's likely all media attention will be focused on the result of that conference.
The charts have been very bullish for the USDCAD as it looked to jump up strongly the charts. So far the strong rally has almost pushed up to resistance at 1.3001 and it's likely the market may look to take a pause here as this will also be a key level for the 20 day moving average. Any drops back down the chart are likely to hold up on support at 1.2887. Overall, the market has so far been looking bullish for the USDCAD and it certainly looks like the real test will be at 1.3001 at this rate, to see if the bulls can continue their momentum.
The greenback shrugs off recent hawkish comments; Oil drops further
The impact of hawkish comments from Fed speakers last week didn’t last long with the U.S. dollar dipping against most major currencies early Tuesday.
Fed’s Vice-Chairman Stanley Fisher grabbed the headlines yesterday after providing an optimistic outlook on the U.S. economy saying that the economy is close to meeting the central bank’s targets and that GDP growth is expected to pick up in coming quarters as investments recover from a surprisingly weak patch. His comments provided the dollar a boost on Monday to recover further from a 2-month low, however, markets seem not yet convinced on the path of normalising monetary policy and need confirmation from Chair Janet Yellen who is due to speak at Jackson Hole on Friday. Although she might provide a positive assessment on growth outlook, I’m afraid that investors who are expecting more clarity on the timing of the next rate hike will be disappointed, and thus the greenback is likely to remain under some pressure on the short run.
The Kiwi outperformed all major currencies, rising 0.8% against the U.S. dollar after RBNZ Governor Graeme Wheeler signaled that rates might not drop much further from current levels as ongoing cuts in interest rates would further inflame an already overheated property market. His speech was welcomed by carry traders who benefit from differentials in interest rates by borrowing a currency with low interest rates to buy a high yielding one. A break above 0.7341 (15-month high) could lead to further gains, but markets might be a little cautious ahead of Chair Janet Yellen’s speech on Friday.
Oil prices fell by more than 1% on both sides of the Atlantic after heavy losses on Monday. The impact of a production freeze agreement had been exaggerated over the past couple of weeks which sent prices from a bear into a bull territory in a matter of three weeks. Speculators who were the major players of the most recent rally might find little reasons to add to their bullish bets now as fundamentals don’t seem to support further gains. Even if OPEC and other major producers like Russia agree to cooperate to freeze at current levels, this isn’t likely to have a much positive impact on prices as output is already at record high. I expect to see some consolidation on the short run with Brent to trade within the $45-$50 range but volatility to remain high.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
GBPUSD continues recovery while Oil extends selling pressure
The Pound is continuing its recovery phase as the new trading week continues, extending gains from last week following economic data indicating that the EU referendum outcome might not have negatively impacted the UK economy in the way that was previously feared. The GBPUSD has reached slightly above 1.32 today with this representing its highest level since early August and some distance away from its low found earlier in the month around 1.28, supporting the argument that investors were enticed towards purchasing the Pound following the economic data from last week easing fears about an immediate downturn for the UK economy.
I still personally think that it is way too early to begin jumping to conclusions that the recent economic releases will set a trend of belief that the UK economy might not be as negatively impacted by the EU referendum outcome as what was initially feared. This whole withdrawal process from the EU, whether it truly happens or not is supposed to take at least 2 years and this means that there are longer-term potential risks to the UK economy that investors will be watching. Investment from overseas, a likely increase in price pressures, whether it leads to a decrease in vacancies from UK businesses and potential impact across leading indicators such as PMIs are just a few variables that the markets will be watching very closely.
Can the GBPUSD continue its rally? The previous investor mind-set for months has been to sell the rally and I don’t personally think this has changed. Potential buyers could be monitoring to see if the GBPUSD closes above 1.32 today, which could on a technical basis set the blueprint for another extension higher. With that in mind we have seen often in the past that the momentum in the GBPUSD can change very suddenly and that when the selling pressure enters the atmosphere, the Pound declines very fast across the charts.
WTI Oil reverses gains
WTI Oil is quickly retreating recent gains and extending selling pressure into Tuesday, with the commodity dropping from its six-week high above $49 to below $47 during trading today. From a technical standpoint, we have been waiting for a weekly close above $51 for months that would have represented a technical trigger in my eyes for a potential further recovery, and the failure to achieve this at the end of last week might be why selling pressure has resumed during trading this week. Another possible reason for the declines from a less technical view is because the recent return to a “bull run” was encouraged by speculation that OPEC might make a change to production output during a reported “informal meeting” to take place next month.
Firstly, I don’t think anyone understands what a so-called “informal” meeting really means! Secondly, we have heard this ongoing story regarding a possible change to production output so many times before and it has so far led to nothing material on a variety of different occasions. It is going to be far easier to bring the words ‘production cut’ to the table than it is going to be to make it a reality across OPEC committee members. what we are probably going to begin hearing once again is public comments that “any possible change to production levels is going to require support and similar actions from both OPEC committee members, and Non-OPEC members”.
By Jameel Ahmad, VP of Corporate Development & Chief Market Analyst
Dollar weakness resumed on Tuesday after a quiet start of the week characterized by the lack of Economic releases.
Earlier this morning, we have seen a decrease in both the German services and composite PMI, while the Manufacturing PMI remained unchanged at 53.6 during this month.
In the meantime, the Eurozone figures came out like the German ones, as the Manufacturing PMI retreated by 51.8 down from 52.0, while both the services and the composite PMI’s came out higher than expected at 53.1 and 53.3 compared to estimates of 52.8 and 53.1 respectively.
Looking at the U.K figures, the manufacturer confidence fell to recession levels post-Brexit as the quarterly index of sentiment dropped to lowest since 2009.
In the U.S, the Manufacturing PMI missed forecasts as the figures showed a slowdown in the U.S manufacturing sector. The PMI came out at 52.1, less than anticipations of 52.6.
In the opposite, New Home sales jumped to almost nine-year high. 654 000 new home were sold in July compared to 582K only in June, moreover, the MoM variation soared to 12.4% while it was anticipated at -2.0%.
Technically, the U.S Dollar remain under pressure as the probability of September rate hike is unlikely (26.0% only), 32.3% in November and 52.3% in December.
Below is today’s USD percentage of change against a basket of currencies:
Looking at the U.S Dollar price action ahead of Janet Yellen speech in Jackson Hole, the Greenback bounced on Friday on the back of profit taking due to the weekly close.
The Dollar recovered near 94.00 weekly support, however, an important bearish trend line that comes from 96.00 peak in the hourly chart keep acting as a strong resistance. This trend line coincide with the hourly resistance level that stands at 95.90, and consequently we expect the Dollar to remain under pressure below this near-term resistance zone.
Overall, the bearish trend remain intact below 96.00 area in the daily chart, while in the hourly chart, if the recent recovery may find an end around 95.90 for another dip below 94.00 support to begin.
The market was briefly surprised by early reports today that oil inventories in the initial survey in the build up crude oil inventories on Wednesday showed a surprise build up of 4.46M barrels. This is certainly a surprise for many traders who had expected a slow draw down in the US as the market continues to slowly improve and demand was expected to increase. This will certainly lead to a revision in the current forecast for Wednesday which is currently positioned at -0.65M barrels, a minor drawdown on inventory reserves.
The real question for oil from a traders perspective is can this take the wind out of the bulls sails so far. In short I think it may be hard as the bullish trend has been strong for some time and the minor pullbacks we have seen look more like profit taking than anything else. Any push down is likely to find very strong support at 45.84 and I would expect this level to hold up in the event of pressure from the markets. Further resistance above the current levels is likely to also be found at the 50.00 a barrel mark.
The kiwi dollar was lacking momentum today as it pushed higher but lacked any real sense of urgency as the market continued to stall in the wake of US dollar movements. For the most part the market refuses to move on the basis that it's looking to see some hawkish guidance from the Federal Reserve, but still feels held up by the prospect that it could in fact be quite dovish in the wake of things. Regardless of the USD movements, there is some NZD data due out shortly which will make waves and that is the trade balance data which I touched on yesterday which markets are expecting to drop slightly to -338M. Not a large drop by any means, but still a negative figure which will be the first in 5 months if it comes to fruition. If we do see a drop here it could be worth watching the Reserve Bank of New Zealand comments in the future as they may look to justify further rate cutting on the basis of a falling trade balance in an effort to support the economy.
Regardless of the half hearted technical breakout today, it seems like that the bulls are still carrying some momentum though just cautious with the Jackson Hole meeting on. The breakout through resistance today at 0.7311 looked to be making some ground, but the market pulled back as USD pressure spiked. What will be key here is if the trade balance data has the capacity to do be positive and propel the NZD through the current resistance levels. If that was the case I would expect the next level for traders to target at 0.7475.
Uncertainty has enveloped the global markets this week with investor jitters intensifying as the lack of direction continues to send ominous warnings ahead of Friday’s Jackson Hole gathering. Global stocks remain pressured with Asia and Europe trading lower as anxiety and erratic oil prices sour risk appetite. Although earlier stock market gains were somewhat impressive, it is becoming increasingly clear that sentiment remains the driver rather than fundamentals and such continues to question the sustainability of the rally. A heavy market selloff may be pending and the ongoing concerns over the unstable global landscape could be the catalyst needed for bears to pounce. Investors should keep diligent this week as the increasing focus on Yellen’s speech may present a threat of creating explosive levels of volatility if market participants are left empty handed on US rate hike timings.
Uncertainty punishes the Dollar
Dollar was left vulnerable to losses on Tuesday following Fed’s Vice Chairman Stanley Fisher’s optimistic outlook on the US economy which failed to rekindle optimism over the Fed raising US rates this year. The visible Fed divide and conflicting stances from policy makers have created a layer of uncertainty that gives permission for bears to attack prices. Although the improving domestic data in the US continues to offer a compelling reason for the Fed to take action, external developments and uncertainty could sabotage the central bank's efforts to act. Market participants may direct their attention towards Yellen’s speech on Friday which most hope can provide some clarity on when the Fed plans to break the extended period of central bank caution. If investors fail to retrieve any clarity from Yellen on US rate hike timings, then the Dollar could be exposed to further losses.
From a technical standpoint, the Dollar Index is bearish on the daily timeframe as there have been consistently lower lows and lower highs. Prices are trading below the daily 20 SMA while the MACD has crossed to the downside. Previous support around 95.00 could transform into a dynamic resistance which could open a path towards 94.00.
WTI balances above $47
WTI Crude was flung onto a chaotic rollercoaster ride this week with prices trading back towards $47 following the 4.5 million barrel build in API weekly crude inventories which enticed sellers to attack. Oil remains highly sensitive to production freeze talks with optimism over OPEC securing a freeze deal in September creating speculative boosts in oil prices. Although Iran has discussed the idea of supporting OPEC’s decision to prop up oil prices, this may be just another strategy to propel oil prices higher ahead of September’s informal meeting. With the fundamentals of an excessive oversupply still present and concerns that demand may be waning, Oil could be vulnerable to further losses. The threat of September’s informal meeting concluding without a deal could encourage sellers to drag oil prices back down towards $40.
Commodity spotlight – Gold
Gold remains trapped in a wide range with prices oscillating between $1345 and $1330 as uncertainty continues to heighten over when the Fed may raise US interest rates this year. This yellow metal has always been sensitive to US interest rate hopes, and with current expectations clouded; prices could remain in limbo until Friday. Risk aversion still lingers across the markets which have kept Gold somewhat buoyed but Dollars resurgence from renewed rate hike hopes may simply drag the metal lower. Investors may direct extra attention to Yellen’s speech on Friday which could pave a fresh path for Gold. From a technical standpoint, bulls need to keep above $1315 to validate the current bullish uptrend.
Oil swung lower today on the surprise build up of US crude oil inventories that was unexpected. The market had priced in a drop of around -0.65M barrels, but after yesterdays early reading of a surplus the market was quick to react, and today's reading of 2.50M barrels show that oversupply issues may not be abating as previously though. This will weigh heavily on the minds of the bulls who looked to be taking control in the long term when it came to price movements, but it seems that with oversupply still being an issue and demand not picking up the bears are looking to take full control and force prices back down lower. Regardless of the technical movements and the market consensus the Jackson Hole summit will have an effect on the USD in the long term, which will trickle over into oil markets and I would expect that the result of this would move the market all together.
Technically speaking oil has been hammered by the bears today and is looking ever more like it's going to shift into next gear and push down to support at 45.90. This level has been very strong in the past and could halt any further advances in the short term, but in the long term it may struggle given how in control the bears actually are. This level also contains the 50 day moving average just below it which could also act as dynamic resistance in the long run. Overall, I am expecting the bears to take control in the short term and push lower until they find proper support and the bulls look to regain control.
The market so far has been relatively upbeat about Jackson Hole and believes that Janet Yellen will indeed look to be somewhat hawkish. This is having a spill over in the markets as the S&P 500 has dropped so far on the back of the belief that the FED will indeed be hawkish and look to push a rate hike in the face of uncertain economic data. This is certainly in the realm of possibility as the FED does not want to give off the impression that it is indeed dovish.
So far the S&P 500 has failed to find any forward momentum and has been stopped by resistance at 2185 as the market lacked any reason to push higher. Instead we have been also trapped between support at 2168, which we saw the S&P 500 push down to today. The 50 day moving average has also moved up and is applying pressure in this area, but I believe it's a matter of time before we see a push lower and the market aim for the next level of support at 2152.
Oil lost between fundamentals and verbal interventions
Markets are struggling to find direction in what seemed to be a boring trading week. The dollar index moved in a relatively tight range of 94.21-94.95, and the S&P 500 was stuck in a 22 points trading range, however the only major action was seen in oil prices which dropped by more than 3.3% since the beginning of the week. So let’s discuss oil!
Talks of a potential deal from members of the Organization of the Petroleum Exporting Counties (OPEC) to freeze production sent oil prices into a bull market territory last week, but these hopes were dampened after Iran said it still hasn’t decided whether it will attend the informal talks in Algiers next month.
Fundamentals have been clearly ignored in August as price action was driven solely by verbal interventions; itremains to be seen whether this is going to be converted into actions. Another disappointing meeting similar to April’s talks in Doha will not only lead to lower oil prices, but also threatens OPEC’s influence on prices going forward. The only major obstacle to reaching a deal has been the Saudi Iranian conflict, and if they didn’t manage to put political disagreements aside, I think it’s going to be another disappointment in September.
Another challenge facing OPEC’s decision is the U.S. shale production. Rig counts rose for 8 consecutive weeks and exceeded 400 for the first time since February. This suggests that U.S. oil producers are ready to start pumping in the next couple of months especially if oil prices stabilise close to $50. A production freeze will end the war on shale oil which brings the question, why did it start in the first place?
Yesterday’s weekly inventory data showed U.S. stockpiles rose unexpectedly by 2.5 million barrels in the week through Aug 19 as refineries input decreased, and I believe that more stocks will be built in the weeks ahead as refineries switch off for regular maintenance, which puts limits on any upside potential move.
Another factor to influence oil prices is the dollar’s direction. All investors are looking ahead to see if Chair Janet Yellen will provide hints about the US Federal Reserve's next monetary policy move. Although she might seem more hawkish on the economy, I’m afraid that investors who are expecting more clarity on the timing of the next rate hike will be disappointed. However, if she decides to surprise and open the door for a September move than a dollar rally will add more pressure on oil.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
