Trump and deja vu of December

The destiny of the agreement on reducing oil extraction is still foggy

The market forcedly has a rest together with Americans, but now turkeys are eaten, the retail counts profits after «black Friday», on the agenda - FRS, OPEC and the last NFP of the current year. Anyway, still early to panic as the growth of dollar can be a temporary phenomenon.

The last quiet week, from the point of view of events, is passed. Long days off in America allowed the foreign exchange market to receive a kickback on the main trends, but in general, all American indexes continued series of record growth, and the account already went to the third week. Donald Trump remains the primary actively discussed subject: future U.S. President devoted to a subject of natural resources only one, but very loud paragraph – about the cancellation of restrictions for the production of hydrocarbons in the USA, including offshore fields that, in his opinion, will add to Americans millions of workplaces.

The world market of energy resources expecting such statements reacted instantly. Instead of losing in price, the barrel jumped up for 4,5% and practically reached $50 though a week ago for «barrel» gave no more than $44, and it was considered as the quite good offer. But if oil rolls down lower than $40, then highly paid vacancies promised by Trump again just risk to evaporate, as the production of slate oil - very expensive.

There were updated estimations of analysts concerning influence «Trump's effect» on the economy of the USA: GDP growth for 2017 - 2.0%, for 2018 - 1.8%; growth of PCE in 2018 - 1.9%; two increases in a rate in 2017 and three - in the 2018th. The main unknown in the current situation is Mr. Trump, one of the basic elements of an election campaign of which were a protectionist rhetoric and promises. At least, while the strengthening of dollar puts the descending pressure on oil quotations, oppresses the American interests and reduces dollar positions as a safe asset.

If the probability of an increase in a rate of FRS in December is traded at the level of 100%, then in protocols of the last meeting of FRS you shouldn't have looked for something new. This factor can also be considered as one of the factors of the current growth of dollar, but from the technical point of view, this growth too much advances events.

Not only the value of rates but also the publication of the bank`s estimation for growth rates of economy and dynamics of the labor market will be a result of a meeting of FRS on December 13-14. If the stakes will be raised after all, and estimations will be rather positive, then implementation of the new economic program of Trump after its assumption of office on January 20 the next year shall become the following driver.

The destiny of the agreement on reducing oil extraction is still foggy, but Sunday unofficial consultations between Iran, Iraq and the UAE increased chances of adoption of serious decisions on November 30. Iran can cooperate from Saudi Arabia because it needs higher prices of oil to attract investments and to increase production in the long term. If the agreement on reducing amounts will be reached after all, then oil has a chance to be fixed for a long time higher than $50.

The European Commission prepares for the publication the requirements which will force the investment banks working in the EU not from the European Union countries to guarantee a higher level of the supplementary capital and liquidity. It will lead to increase in demand for European currency though U.S. FRS is ready to resolve the unrestricted use of the dollar swap lines to prevent the excessive growth of costs on dollar loans for foreign banks.

Draghi declared again that the ECB is committed to preserving soft policy for the accomplishment of the purpose on inflation, is more specific - it means that the Central Bank can begin to buy on balance fewer bonds of the countries which deficit of bonds in the market only began to be shown.

The Asian markets generally are in a green zone and only Japan is allocated on a general background. The current month can become history as the worst month for yen for the last eleven years. Due to the fall of the need for refinancing the Ministry of Finance of Japan plans to reduce the emission of bonds to a 6-year minimum - about ¥150 trillion in the following financial year. As the speed of increase in an FRS rate can be accelerated during a Trump`s management of the country, the cost of currency hedging probably for the Japanese investors will continue to grow. Nevertheless, the chance of restraint of inflation is available for BOJ so far, especially after many months of negative values.

From other information it should be noted:

  1. According to «the hidden sources» of Bloomberg, among members of the council of Managing directors of the ECB confidence ripens to detain the announcement of QE prolongation. Draghi likes it or not, but after profitability increased, there is no need of urgent adjustment of parameters of bond purchases anymore, and also are accurately shown a decrease in positive effect from euroQE and concerns of negative effects within the next 2-3 years. Of course, meanwhile it doesn't pay to make a mountain out of a molehill, but activation of comments of important persons on this subject will put the additional verbal pressure upon a distressful rate of euro/dollar.
  2. The draft of purchase of legal nationality of the EU by British who plan to live and work in the European Union countries after Brexit is discussed In European Parliament. It concerning everyone could still use privileges which the European nationality gives, in exchange for an annual money contribution. It will allow to protect at least partially the rights of 48% of British who voted in a referendum against a country exit from the EU. Vote on the draft and approval in the European Union countries is planned to be carried out until the end of 2017.
  3. The autumn report of the Ministry of Finance of Great Britain showed that achievement of the deficit-free budget is possible not earlier than the 2020th years, multi-billion investing programs are assumed, despite tough in borrowing and costs. All this is final provided that Great Britain will conclude an agreement for access to the market of the EU.

The calendar of the current week is eventful, since Monday the next entrance of Draghi. Except for OPEC, in focus is the key American data, including NFP, GDP and the Beige book. Most likely, before FRS the dollar will show smooth correction down and only on strong NFP can get the next local support. Also, only renewal of large-scale sales of government bonds of the U.S. Treasury can influence a situation. If the profitability of these papers doesn't grow and will be adjusted at present levels, then the dollar will remain under small pressure - so we draw the corresponding conclusions.

EUR/USD: supports: 1.0590 - (1.0516/1.0497) (protection of option level 1.0500) - (1.0440/1.0430) (protection of market makers); resistance: (1.0680/1.0700) (protection of level 1.0700). Preference to trade in the range of 1.0600 - 1.0720, breakdown is possible only on strong fundamental data. At steady trade lower than 1.0700 risks of further pressure remain down.

USD/JPY: resistance: 112.90 - 113.70 (strong) - 114.40 - 115.00 (protection of market makers); supports: (111.50/111.11) (strong) - (110.30/109.90) (protection 110.00). Trade can provoke unexpected falling to levels 108.50 below - 107.00. Correction is necessary up, it is possible to buy carefully on recessions. Sales - only at sure breakdown 111.70.

Author: Lachlan Patel,
ForexChief Currency strategist