Oil Is Slip Sliding Away

The highly anticipated OPEC meeting disappointed expectations as the cartel extended plans to limit production but did not announce deeper cuts. Oil prices were smoked in a classic case of buy the rumour sell the fact as markets prepositioning suggested some speculators were pinning hopes for a more bullish outcome. While a cruel move on WTI ensued, US equities shrugged off the oil spill propped by strong retailer earnings results.The uptick in earnings is turning more than a few heads this morning as efficaciousness of brick and mortar retailers to compete with online retailer was growing. The pleasant surprise saw the S&P close up .5%

On the US data front, dealers mostly ignored this, as the tier 2 releases were mixed with stronger initial claims results offset by downside disappointments in advance goods trade balance for April which showed a larger than expected deficit of -67.6bn and wholesale inventories were negative, declining -0.3% MoM vs. +0.2%. I suspect dealers will do little more than shrug off most data points leading up to next week’s granddaddy of them all, Non-Farm Payroll.

Dollar bulls took solace in Fed member Brainard's “brighter“ outlook comments. Although more fluff than candour, some are latching on to a shift in the ”Uber Dove Brainard” language as significant. Mind you US Treasuries sold off and provided a reprieve for the dollar.

The market is still having trouble making sense of the post-Fed minute’s price action. While the minutes did contain the usual level of verbal gymnastics, by all accounts it did provide confirmation that the FOMC is moving full speed ahead, so why isn’t USD/JPY trading higher?

While the shifting focus to all things “ balance sheet” reads marginally hawkish, the markets acuteness to inflation and wages plays out dovish for the rest of the curve unless of course the data points otherwise. Hence the reason why next week’s NFP and in particular the wage growth component is a huge inflexion point.

Euro

EUR/USD dips continue to be covered mind you at a much slower pace as we enter the weekend. The EUR/USD ran into a wall of resistance at 1.1250 overnight from profit takers who were content to start the long weekend process of position unwind after a bountiful run on the euro this week. Look for further position squaring to dominate flow today; it could get choppy.

The song remains the same. With ECB in two weeks, we should expect a heightened level of market discourse between now and then as this policy battle unfolds.

Japanese yen

Better risk appetite should eventually carry the day on this trade, and with dips remaining very shallow we could see some appeal for long USD/JPY emerge next week. In the meantime, the market continues to rotate into EUR/JPY for now because of quicker price action, while maintaining a dip bias on the USD/JPY.

Australian dollar

We don’t even need a crystal ball for this view as the market had all but convinced itself that selling above .7500 is the trade.

Action continues to pick up on the AUD/NZD (Dairy vs. Iron ore) as we approach the critical 1.0600 level. Given the resilience in milk prices and the recent wobbles in iron ore, high NZD trade balance notwithstanding, a break of 1.06 should see significant buy-in which could pressure AUD/USD toward .7400 level.

Chinese yuan

USD/CNH is the hot topic and very well offered in the interbank after the CNY fix continues to come out below model consensus. In defiance to the Moody’s downgrade, the state-owned banks are big sellers of the dollar as the PBOC want the currency strong and stable. While dealers were testing the waters buying dips early in the week post fixing, once again dancing with Tiger has proven to be a dangerous pastime in the currency markets.

Malaysian ringgit

The market continues digesting the oil spill. The USD/MYR has pulled back from overnight yet remains surprisingly constructive despite the massive drop in oil prices.

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