Buckle in for an action-packed holiday-shortened week brimmed with essential events, none more significant than the May employment report particularly in light of the recent dovish conversation on wage growth in the May 2 FOMC minutes. A marginally firmer reading on the AHE could set the dollar tone through June FOMC.
Last week's slight risk-off sentiment and pre-holiday positioning led to USD outperformance across G10 as the market continued to iron out what is happening with Italy, Trump-Kim summit and US-China Trade, especially the USTR final decision on Section 301 tariffs which could trigger a Chinese reprisal. And of course, let’s not forget NAFTA as negotiators and the market face a hard deadline of May 31.
But with no shortage of moving parts, the currency markets have opened with a bang this morning as the EUR/USD, and USD/JPY are trading + 50 as the markets mull the latest in Italian politics and the US-North Korea summit. So much for US and UK holidays influencing a quiet start to the week.
A relief rally on the euro is underway as Italian President Mattarella rejected PM-designate Conte’s candidate for finance minister – Paolo Savona, a die-hard Euroskeptic. But given how high emotions run in Italian politics this is far from over but indeed will be viewed as a vote of confidence for the euro and temper Italy contagion fears.
All roads do lead to Singapore, at least on June 12 anyway, as the Trump-Kim Summit is (apparently) going ahead – which should be risk-friendly news for the markets. But with USTR final decision on Section 301 tariffs looming, the markets are not jumping for joy just yet.
Oil Markets
Given oil market positioning, prices were going to be susceptible to the slightest bearish news. Russia, Saudi Arabia and the UAE’s comments after the St. Petersburg meeting hinted that the cartel was considering providing more supply to offset the Iran and Venezuela supply disruption. Not to mention President Trump is coercing OPEC to stop manipulating prices via supply curbs after gasoline breached 3 dollars per gallon ahead of the Memorial Day long weekend.
Whether it was nothing more than an OPEC trial balloon or not, the markets plunged 4% on the outside chance this could lead to a compliance breakdown. However, what the producer decides to do at the Vienna June 22 meeting will likely have much about where prices are sitting as it will about supply dynamics at that time.
Adding to the downward momentum was US oil rigs this week which rose by a gargantuan 15 to 859. But keep in mind the data does come on the heels for flat rig count at 844 the week before. Nonetheless, it's an impressive number and suggests shale drillers are not expecting prices to fall off the ledge which is probably correct given that additional supply disruptions are more likely than not.
Gold Markets
Likely another week of conflicting indicators as Italy contagion fears, US-China tariff escalation and Trump- Kim summit concerns are offset by the rising US dollar which remains the primary headwind for gold price. There’s a deluge of key US economic data this week that could test the USD fortitude after the greenback has shown some incredible backbone in May. Given a busy economic docket awash with high-risk events, while dotted with geopolitical headlines, volatility abounds. However, risk sentiment has opened in a much more friendly place this morning as a relief rally has ensued with the Trump-Kim summit back on while the EU is in the midst of a relief rally after Paolo Savona was not endorsed for finance ministers in Italy.
With that said, gold positions have turned a bit oversold above $1300 indicating we could see a significant bounce higher if the USD buckles on weaker than expected economic data. The dollar remains the overall driver, but traders are not positioned for worst case scenarios in the trade war or any negative fall out from the North Korea summit, so gold prices could also catch a fillip if one or both of these key market storylines go sideways.
Currency Markets
Some political risk is unwinding this morning, but market dynamics hold true.
EUR: While longer-term influences remain negative for the USD, near-term growth dynamics based on the recent run of weak economic data in the EU are providing tailwinds for the USD. Short-term growth narratives will continue to influence relative monetary policies (negative ECB and positive Fed). So until we see this reverse, the EUR/USD will continue to trade off its back foot.
JPY: The dynamics of trade disputes along with higher US interest rates suggests the bar is high for the Nikkei to move significantly higher over the next few months. Ultimately a collapse in the Nikkei could pull USD/JPY lower. The Nikkei is only up 100 points in futures trading on the North Korea news, so the balance of risk could remain lower.
MYR: Despite slightly better risk sentiment on the back of the North Korea headlines, the elephant in the room is the discussion around government debt. My guess, since when dealing with political risk is a calculated guess is all we have given political risk is so very very difficult to quantify. But the Ringgit will most likely put in a repeat performance of last week while gravitating to the higher end of the current 3.95-4.00 support and resistance zone. Local political thunder clouds remain threating, but expect external factors to drive momentum where EM currencies, in general, continue to fall under pressure as the US dollar remains well positioned vs the euro heading into the weekend.
Oil prices look very heavy both from a fundamental and technical perspective, suggesting we may be coming to an end in the bull market run. And this could weigh on MYR sentiment. The potential increase in OPEC output to counter global supply concerns due to Venezuela and Iran could lead to a breakdown in OPEC/Non-OPEC compliance.