First winter gifts from ECB and OPEC

The market has practically ignored NFP - no advertised rally has been staged
The phrase "if the conditions allow" is becoming a universal argument for problems and the basis for their resolution. Last week, manipulation with expectations resulted in massive losses and strong adjustment not only of currency but also of stock interests around the world. US dollar index fell by more than 2% - the biggest intraday fall since 2009. The market is still digesting its results. The thing that everybody was so much afraid of did not happen. ECB was expected to take more active actions, confidence in QE expansion was too overstated, and in the result, many large players had losses on their short positions in euro. Goldman Sachs and Bank of America Merrill Lynch openly stated that ECB President "lost their credibility", but that will hardly be a great loss for Mario.

ECB has reminded that the role of central banks was rational management and not the support of economy at any price. Eurozone already realizes that QE effect has not produced the effect expected and there is no sense to expand it now - Draghi has refused to increase the volume of stimulation to critical levels. The decrease of the deposit rate is a simply ECB's demonstrative measure: punishment of bank that "park" their money on ECB deposits. QE expansion has been voiced but it rather deals with time than with quantity - until the end of March 2017 (and further is necessary). The market has decided that nothing terrible will happen to euro any more, and has gone up dramatically quite reasonably. Most likely ECB counted on the strengthening of euro - it has also been expecting FOMC decisions.

For the first time in 10 years, OPEC has not stated even a formal limitation to oil production in the nearest future at its meeting on Friday. The cartel continues to keep low prices in the struggle for its share of the market. The raw materials war waged between Saidi Arabia and Iran is moving to a new stage: the latter is getting ready to increase production and export after cancelation of sanctions next year. Prices or Brent and WTI have tested the minimums of this year, and large consumers are returning to the American oil again. Four out of five largest global state funds are located in oil-dependent countries. The largest companies such as Old Mutual Asset Management, Northern Trus or Aberdeen Asset Management have been experiencing losses due to withdrawal of funds by state investors this year. The countries of the Persian Gulf spend money actively on patching "wholes" in the budget caused by dramatic fall of oil prices.

The market has practically ignored NFP - no advertised rally has been staged. Rate increase by 25 bps has long been considered in forecasts, and new stimulus measures are required for serious moment. Traditionally, the report that has been published is moderately good; however it has a tint of poison in it:

- the qualitative component of the employment market is low, employment in production has been growing at a low rate;

- employment regarding part-time workers (involuntary part-time workers) grew by 319 thousand in November, and that was after a decline in September and October: almost 6 mln people work part time due to decisions made by leadership or absence of normal work;

- the principle of employment recording in the USA does not take into account those who look for a job more than 12 months, and therefore, internal distortions of the labor market are far more serious that the statistics shows.

It turns out that the Federal Reserve does not need any blow-ups of employment, it is well suited by gradual mechanical growth of labor market. Little things are given key significance, reality is adjusted in order to avoid ground for the increase of rates, the decision regarding which already looks as adopted. The conditions for raising FRS rates have long "spread out" in time and space; however, that confidence on the futures market makes already 80% today. December is the last and the most convenient chance - it will be very difficult to make such a decision further. The FRS team has been preparing the information background in advance in order to avoid excessively dramatic growth of US dollar exchange rate on this very decision.

However, it is necessary to remember that large investment funds are getting ready for fixation of positions at the end of the year; and therefore, even if FRS raises the rate, US dollar may give up its positions anyway - any speculations regarding purchase of dollar will find demand on the part of "real money". This week, US data on retail sales are expected; it is possible that the numbers will be strong, and, meanwhile, dollar will fall. The task is - to catch strong pre-Christmas liquidity in time.

The following can be mentioned from among other important news:

  1. Yesterday's Kuroda's speech shows that the Bank of Japan has no plans for folding its aggressive easing program, as well as it does not have any support from the use of monetary and credit policy for fighting certain "financial disbalances". The revised GDP data prove that the Japanese economy has avoided technical recession. The program for assets redemption has already led to negative yield of state bonds, and the experiments with negative deposit rate for stimulation of crediting are not required.
  2. China has opened its chairmanship in G20 by advocating the idea of reduction of the role of US dollar in the global economy and for strengthening of the IMF role in order to make the global economy more stable against stresses. A work group headed by South Korea and France has already been formed for preparation of offers.
  3. SNB is not going to conduct interventions for supporting EUR/CHF exchange rate: the volume of commercial demand deposits for covering cash balances has actively been reducing. Swiss currency continues its growth because of its status of the global reserve currency, low prices for raw materials, and high geopolitical risks.

Separately, we need to mention the influence of "fake" information speculations last week; there were two pieces of them:

  1. Financial Times, approximately 7-9 minutes before the publication of ECB's Protocol, published unconfirmed information that European rates remained without changes. When this information got to Twitter, it led to massive stop hunting and FT's following apologies will not restore money lost by traders.
  2. Reuters published the data of Canadian GDP 12 minutes earlier; however, owing to technical specialists, the news has not gone far. USD/CAD quotes stayed until the official release; however, it still affected liquidity - brokers produced excessive growth of spread (which caused large "slippage").

EUR/USD. On Monday, sales in the framework of adjustment were observed, but the rate restored to the Friday level. Now, there is no active appetite to add to short positions on the interbank market and among real-money accounts. Mid-term resistance: 1.0892/1.0926/1.0985/1.1040/1.1090/1.1130. Nearest serious support levels: 1.0791/1.0750/1.0720/1.0690/1.0650. At 1.0835 and 1.0760, there are strong market makers' icebergs. For now, bears are predominant on the market, but they stopped in the expectations of the American news and the penetration of level 1.0820.

Author: Lachlan Patel,
ForexChief Currency strategist