The big news in markets this morning is that OPEC has agreed to a preliminary deal to cut production. After endless hours of discussion in Algeria, OPEC reached a consensus that a reduction in oil production is necessary.
Market share continues to be the contentious issue, despite OPEC’s member countries agreeing on a production limit of 32.5mn to 33mn barrel per allocation. A subcommittee will be formed to iron out the details, so market exuberance will likely be tempered until the November OPEC meeting.
Ultimately, this move should provide a near-term floor on oil and should be a stabilizing factor, especially for downside assaults, as fundamental supply concerns continue to be the primary driver in oil prices. Predictably, the oil patch complex and commodity based currencies enjoyed the afternoon limelight.
The OPEC deal, in principle, plays favorably for US shale oil producers, who will ramp up production if prices move north of WTI US $50.00. In this brave new world of oil production, the only way for a long-lasting bounce would be for non-OPEC members follow suit.
Aussie dollar
The Australian dollar had a +35 pip bounce in the wake of the OPEC preliminary agreement, but was nonetheless trading very productively this week. In addition to the bounce in commodities, the AUD/USD is underpinned by a growing consensus that the RBA will remain on hold for the foreseeable future, underscoring the current market view of the aussie as a safe haven high yielder.
With the RBNZ signaling a rate cut may be in the offing, the Australian dollar has turned into the G-10 market favorite carry, while both US political landscape unfolds and market expectations for a December Fed lift off strengthens.
Japanese yen
Despite the favorable bounce in the risk sentiment post-OPEC decision, USD/JPY pessimism remains high and we are likely to see traders continue to sell into rallies. Despite the growing pessimism, the pair has remained relatively resilient, as there is some debate among dealers that a move below ¥100 will increase the likelihood of intervention. This shift is up from a consensus of ¥95, as suspicions reign that the MOF may step up their game after the BOJ failed to ease at the last meeting.
The USD/JPY is extremely vulnerable to any negative US economic data and remains very much exposed, unless the market starts to buy into the Federal Reserve Board multiple rate hike mantras with forward guiding to a high degree of certainty for a December lift off. On the Fed speak front, a consensus is elusive with Kashkari and Evans continuing with dulcet dovish tones, while Mester takes a Hawkish tack.
While today’s oil price movement are supportive of USD/JPY, it is unlikely to be a dominant force as the oil markets are still dealing with major supply concerns.
USD/CNH activity picked up considerably yesterday, as offshore funding pressure abates and a sense of finality over the SDR support erodes. But, certainly seeing good two-way interest in the market the past 24 hours.
Short term support from coming from the OPEC agreement, but the pair remains the region's underperformer. Oil should stay supportive short term, but until a convincing break above $ 50.00 per barrel the USD/MYR will continue to be supported on dips.