Politics drive dollar while fundamentals boost euro
The USD gained against commodity currencies but was soft against safe havens given the political situation in Washington. The Trump Administration scored a major victory with Congress passing the tax overhaul bill by a vote of 227–205. The Senate proposal will be voted after Thanksgiving and diverges from the congress version with Republicans aiming at passing both and consolidating into a single bill. The positive momentum from the legislative victory was short lived as it emerged that Special Council Mueller subpoenaed the Trump campaign regarding its ties to Russia.
Politics will play a big part during the week as the UK Prime Minister’s authority has been questioned and could end in a no confidence vote with sterling traders looking for more clues on this development. Brexit negotiations are ongoing but there have been a recent string of concerns regarding how well thought out the whole divorce strategy really is.
The U.S. Federal Reserve will publish the minutes form its November meeting on Wednesday, November 22 at 2:00 pm EST. There will be more clues on where certain policy makers stand regarding inflation, but the market is still pricing in a 99 percent probability of a US rate hike in December. With the US market closed on Thursday and Friday due to the Thanksgiving holiday European PMI releases on Thursday, November 23 could boost the EUR if the string of positive data continues in Europe.
The EUR/USD gained 1.10 percent in the last five days. The single currency is trading at 1.1792 after making most of the gains this week early on strong economic data out to Europe and the ongoing political quagmire in the US. MarketPulse Analyst Kenny Fisher pointed out the strong performance of European fundamentals.
The eurozone economy continues to perform well in the third quarter. German GDP accelerated to 0.8%, while Eurozone Flash GPD remained steady at 0.6%. However, inflation remains the fly in the ointment, with levels well below the ECB target of around 2 percent. Weak inflation has kept the ECB cautious regarding its monetary stimulus program. The ECB said in October that it would chop asset-buying from EUR 60 billion to 30 billion each month, but added that it was extending the scheme until September 2018. Jens Weidmann and other senior policymakers want the ECB to act more aggressively, and have called on the ECB to announce a termination date to its stimulus program. However, Mario Draghi appears in no rush to wrap up the scheme, especially with no inflation pressures on the eurozone economy. With Draghi and Weidmann holding different views on stimulus, it will be interesting to hear both central bank heads speak at the same event on Friday.
The NAFTA fifth round of talks have entered its second day and for this round the Trade Ministers from the three nations will not be present. They held talks at the APEC Meeting in Vietnam. This could free up the negotiators to move forward in the renegotiation of the Trade agreement with less political interference. Ministers might also not be present in the sixth round held in Washington.
European Central Bank (ECB) President Mario Draghi will be speaking on Monday, November 20 at 9:00 am EST during his testimony before the European Parliament. He is not expected to wander too much from the comments he made earlier today. He has reiterated the need for patience when normalizing monetary policy. Europe has posted strong numbers, but inflation remains an area where gains have lagged.
Oil prices rebounded on Friday and almost recouped all the losses form earlier in the week. The price of West Texas Intermediate is trading at $56.31 but it did fall below the 55 price level after a surprise buildup of weekly crude inventories in the US. The arrests in Saudi Arabia and the high probability of an extension to the Organization of the Petroleum Exporting Countries (OPEC) production cut boosted oil prices.
On the other hand higher expected production out of the US and lower demand estimates from the International Energy Agency (IEA) combined with the surprise gain reported on Wednesday. Crude shorts took profit ahead of the weekend to avoid more uncertainty as more news could come out of the Middle East on the weekend, which ended up putting WTI within a small distance from the start of the week.
The battle between the rise in production in the US and the cut agreement between OPEC and other major producers will continue. The Russian Energy Minister Alexander Novak spoke yesterday to reassure that Russian producers are committed to the agreement to cut output, but he did not mention if they will go ahead with an extension of said agreement. The OPEC and major producers will meet in Vienna on November 30.
Ecuador has stopped its plans to seek an exemption from the OPEC deal after prices have reacted to the group’s production agreement. The small oil producing nation had also floated the idea of leaving the cartel to be able to pump at levels that would make it easier to balance the country’s budget.
Iraqi and Turkish officials are close to reassuming crude exports form the Kurdish region of Kirkuk. The independence referendum was not recognized by Iraq and backed by Turkey it threatened military action. Oil production form the region has not been able to leave for export but those issues are now being worked out between Turkey and the Iraqi government.
The USD/CAD gained 0.92 percent during the last five trading days. The currency is trading at 1.2801 despite the price of oil walking back most of the losses this week. A low inflation data point on Friday at 0.1 percent and Bank of Canada (BoC) Deputy Governor Wilkins speaking in NY did not leave the market a clear message that a rate hike is in the cards for the Canadian interest rate this year.
The loonie had a moment on Thursday with petroleum and coal products were behind the lift in Canadian manufacturing sales. The forecast form economists called for a 0.3 percent decline but instead showed a 0.5 gain. The energy industry was the big winner with a 10.3 percent increase in September. The move was short lived as the almost flat inflation reading on Friday after the BoC Deputy Governor already pointed out that it would take more than inflation beating the current target for the central bank to remove eve more stimulus. This is seen as a sign that the BoC could be expecting higher inflation as the loonie depreciates and oil at stable prices could drive higher wages but with the unknown fate of NAFTA and a housing market awaiting new mortgage rules it would be more prudent for the central bank to wait.
Market events to watch this week:
Monday, November 20
9:00 am EUR ECB President Draghi Speaks
7:30 pm AUD Monetary Policy Meeting Minutes
Tuesday, November 21
4:05 am AUD RBA Gov Lowe Speaks
6:00 pm USD Fed Chair Yellen Speaks
Wednesday, November 22
8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Meeting Minutes
4:45 pm NZD Retail Sales q/q
Thursday, November 23
4:30 am GBP Second Estimate GDP q/q
8:30 am CAD Core Retail Sales m/m
11:30 am CHF SNB Chairman Jordan Speaks