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Dollar Rips Higher As OPEC Inks Deal

By Kathy LienForexNov 30, 2016 04:01PM ET
www.investing.com/analysis/dollar-rips-higher,-opec-reaches-deal-200167523
Dollar Rips Higher As OPEC Inks Deal
By Kathy Lien   |  Nov 30, 2016 04:01PM ET
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By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The OPEC meeting may have been the main focus Wednesday but the soaring U.S. dollar was the big story. The greenback ripped higher against all of the major currencies with USD/JPY breaking above 114 in the process. The currency pair made a new 8-month high and is now eyeing 115. The rally was driven by back-to-back upside surprises in U.S. data along with a sharp rise in U.S. yields. The positive Beige Book also supported the move but the bulk of buying happened before the report was released -- and before the European close. There’s no question that dollar bulls remain in control and insist on driving the greenback higher into Friday's NFP. There is still the risk of profit taking but the path of least resistance for the greenback remains higher. Although personal-spending growth slowed, personal incomes grew significantly more than expected in October. The Chicago PMI index also jumped from 50.6 to 57.6 but the trend for the dollar was set early on by ADP, which reported an increase of 216K jobs in November, up from 147K in October.

The focus now shifts to Friday’s labor-market numbers and all signs point to a strong report. Job growth had been relatively mild over the past few months but the Federal Reserve continues to tout the improvements in the labor market. We saw that again in Wednesday’s Beige Book. Their bar could be low or they are satisfied with an improving unemployment rate and job growth below 175K. Either way, their optimism has driven the forecasts for November’s release higher with economists calling for nonfarm payrolls to rise by 180K. We won’t be publishing on Thursday so we want to take this opportunity to share our outlook for NFP. This month’s report is more difficult to handicap than others because non-manufacturing ISM won’t be released until next week. But we have every reason to believe that job growth accelerated. Jobless claims have been low, confidence is at a 9-year high according to the Conference Board’s report and ADP reported a significant uptick in private-sector payrolls. Corporate earnings are also rising and while the manufacturing ISM report won’t be released until Thursday, it doesn’t change our positive outlook. However the dollar’s reaction to nonfarm payrolls is not as clear as our forecast for NFP because in order for the dollar to rise, job growth needs to meet or beat expectations, the unemployment rate needs to hold steady and average hourly earnings growth needs to increase by 0.3% or more. The greenback has run up a lot ahead of NFP and that’s a lot to ask -- especially after last month’s sharp increase in wage growth. Should the labor-market report fall short in any way, we could see significant end-of-week profit taking in USD/JPY.

After weeks of difficult negotiations, OPEC ministers finally announced a deal in Vienna to cut daily oil production by 1.2 million barrels, sending oil prices sharply higher. While some analysts had hoped for a 1.4 million reduction there was a good chance Tuesday night that there would be no deal, so everyone was relieved when an agreement was reached. In Tuesday’s note, we said oil prices would soar if a deal is done because of the extent of short positions and on Wednesday the price of crude jumped over 10% on an intraday basis. Non-OPEC nations were also asked to reduce production by 600K barrels a day with Iran given a special exemption to keep raising production. This concession reflects how desperate oil-producing nations are to end the supply glut and reverse the downtrend in prices, which is less than 50% of the 2014 lows. The deal is still contingent on the participation of non-OPEC nations like Russia, which has said it can only reduce production at a moderate pace. Either way, we expect oil to continue moving higher in the coming days and USD/CAD to move lower. Canadian GDP numbers also rose more than expected on a monthly and quarterly basis. The only thing supporting USD/CAD is the stronger increase in U.S. versus Canadian yields.

The Australian and New Zealand dollars were hit from all sides Wednesday by weaker data, a rising U.S. dollar and lower oil prices. Gold, iron ore, steel and copper all saw losses. In Australia, building approvals dropped more than -12%, which was significantly worse than the market’s forecast for a 2% rise. In New Zealand, business confidence ticked lower. However NZD managed to outperform AUD thanks to RBNZ Governor Wheeler’s comments overnight. The central-bank head said he expects inflation to rise back to their target band in December. Australian and Chinese manufacturing PMI numbers were scheduled for release Wednesday evening.

The greenback's rebound drove the euro lower for the first time in 5 trading days. The latest Eurozone economic reports were actually pretty good with German retail sales rising strongly in October. Consumer spending jumped 2.4%, which was more than double the market’s forecast. German unemployment also fell by 5K in November keeping the unemployment rate steady at 6%. These numbers are consistent with the recent optimism from Mario Draghi who sees the Eurozone economy expanding at a moderate pace and with the “gradual upward economic trend set to continue.” While euro saw mild losses versus the greenback, the German--US 10-year yield spread fell sharply, signaling a near term top for EUR/USD.

For sterling, month-end flows translated into wild intraday volatility for the currency. No major U.K. economic reports were released Wednesday but on Tuesday night we learned that consumer confidence fell sharply in November. The GfK index dropped to -8 from -3 and according to GfK, the deterioration is largely attributed to concerns about Brexit. The economic outlook index dropped to -22 from -17 as the British worry about what is in store for the coming year. The U.K.’s PMI manufacturing report is scheduled for release on Thursday and given the sharp rise in the CBI industrial Trends, the number should be weaker.

Dollar Rips Higher As OPEC Inks Deal
 

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Dollar Rips Higher As OPEC Inks Deal

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Comments (7)
Baldo Yan
Baldo Yan Dec 02, 2016 4:47AM ET
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Any new update Ms Kathy for today :)
Gobz Arik
JackyFX Nov 30, 2016 5:48PM ET
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Kathy is the only one who makes much sense in her analysis ;)
Matthew Adams
Matthew Adams Nov 30, 2016 5:38PM ET
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This was bigger than a 9% gain not too mention the energy stocks.... lol
Maria Gallo
Maria Gallo Nov 30, 2016 4:56PM ET
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Grazie Kathy! :)
Carlito Carlito
Carlito Nov 30, 2016 4:49PM ET
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Thanks alot Kathy
Dannii Thax
TraderThax Nov 30, 2016 4:41PM ET
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Any idea on AUDUSD for tonight into AM? Was expecting a stronger down esp after Beige Report
Kavika Lotomau
Kavika Nov 30, 2016 4:36PM ET
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As always! Thanks Kathy.
 
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